Acceptance The drawee's acknowledgement of the LIABILITY on a BILL OF EXCHANGE, in writing on the instrument itself.

A bill may also bear the co-acceptance by a bank, which is a guarantee to honour the instrument in the event of default by the drawee. Accommodation Bill A BILL OF EXCHANGE without any consideration, or quid pro quo. In this case, a person signs a bill and makes himself liable, without receiving any value in return, such as, an advantage or a benefit. The purpose of accepting such a bill is to accommodate the drawer who is temporarily in need of funds. The acceptance enhances the LIQUIDITY of the instrument, which can be discounted by the drawer with a bank. Accrual Basis A method of accounting that recognizes revenues and expenses as they accrue, even though cash would not have been received or paid during the accrual period. ADR An acronym for American Depository Receipt. It is an instrument traded at U.S. exchanges representing a fixed number of shares of a foreign company that is traded in the foreign country. By trading in ADRs, U.S. investors manage to avoid some of the problems of dealing in foreign securities markets. The ADR route enables companies to raise funds in the U.S. financial markets, provided they meet the stringent regulatory norms for disclosure and accounting. (See also GDR.) Allotment The acceptance of an application subscribing to the shares or other securities of a company. Such allotment establishes the contractual relationship that underlies an investment through public subscription. Amortization The reduction f an amount at regular intervals over a certain time period. This term is used to refer to the reduction of debt by regular payment of loan installments during the life of a loan. It is also used to described the accounting process of writing off an intangible ASSET. Annual Report A yearly publication that contains particulars relating to the operating data of a company, and which is published and distributed by the company to its share-holders, as per the requirement of the Companies Act. The important contents are the profit and loss statement and the BALANCE SHEET. These statements show a company's performance in terms of sales and earnings during a financial year, and also its year-end financial position in terms of ASSETS and LIABILITIES. It also contains the directors' report, a notice to the shareholders about the proposed business agenda of the annual general meeting and the auditor's report. Arbitrage The simultaneous purchase and sale transactions in a security or a commodity, undertaken in different markets to profit from price differences. For example, an arbitrageur may find that the share of The Tata Iron and Steel Company (TISCO) is trading at a lower price, at the Vadodara Stock Exchange compared to the exchange at Bombay. Hence, he may

simultaneously purchase TISCO stock in Vadodara at, say Rs.250, and sell in Bombay at a higher price, say Rs.256, making a profit of Rs.6 per share less expenses. Asset Management Company (AMC) A company set up for floating and managing schemes of a MUTUAL FUND. An AMC earns fees by acting as the PORTFOLIO manager of a fund. The AMC is appointed by the Board of Trustees, which oversees its activities. Thus, a mutual fund is generally established as a trust by a SPONSOR, which could be a registered company, bank or FINANCIAL INSTITUTION. Also, a custodian and a registrar are appointed to ensure safe keeping of the fund's securities and to deal with investors' applications, correspondence, etc. At-the-Money The term relates to trading in listed OPTIONS. An option is said to be trading "at-the-money" when the STRIKING PRICE and the market price of the underlying share are equal. (See OPTIONS as well as Appendix II). Badla System An Indian term for a trading system with a mechanism for deferring either payment for shares purchased or delivery of shares sold. The system, discontinued by the Securities and Exchange Board of India (SEBI), from March 1994, was applicable to A group or 'Specified' shares. For carrying forward a purchase transaction from one settlement period to the next, the buyer normally paid the seller a charge termed badla or 'Contango'. This consideration would be fixed in the badla session. When buyers could not take delivery, badla financiers would step in and help out the buyers. In the reverse but abnormal situation, when the market was in an oversold position and a buyer demanded delivery but the seller could not respond even by borrowing shares, the buyer would be paid a 'Backwardation charge', also known as undha badla. However the buyer could insist on delivery, instead of accepting deferment charges, leading to an auction of the shares in question. The contango or backwardation charge depended on various factors including the extent of outstanding position, short sales, floating stocks, and the prevailing interest rate. The criticism against the badla system has essentially been on two counts: equity and transparency. The system was slanted in favour of short sellers who could, in a normal market situation, earn interest even without owning the shares sold (it has been argued though, that such short selling helps to check speculative and frenzied buying). Also, it was suspected that the contango and backwardation charges reportedly decided at the badla sessions were often untrue. Besides, it appears that the limit of 90 days within which the carryovers were to be settled, was often exceeded. Some features of the new system of CARRY FORWARD (CF), introduced at the Bombay Stock Exchange in January 1996, are : 1. 2. 3. 4. Sale or purchase of transactions may be carried forward up to 75 days. Brokers are to classify the transactions, as to whether for delivery or CF, and report daily. Badla sessions will be screen-based. Strict monitoring of brokers' positions with the imposition of various margins: daily, mark-to-market and CF.

A more liberal Modified Carry Forward System based on the recommendations of the J. S. Varma committee was introduced in 1997. Salient features of the new system include an increase

in the overall carry forward limit per broker, reduction in daily margin and removal of the limit on financiers. Balance of Payments A statement that contains details of all the economic transactions of a country with the rest of the world, for a given time period, usually one year. The statement has two parts: the Current Account and the Capital Account. The 'Current Account' gives a record of a country's: (a) Trade Balance which shows the difference of exports and imports of physical goods such as machinery, textiles, chemicals and tea, (b) 'Invisibles' that comprise services (rendered and received) such as transportation and insurance and certain other flows, notably private transfers by individuals. When imports of goods exceed exports, it is referred to as a 'Trade Deficit'. However, the overall current account position depends on both the trade balance and the performance of 'Invisibles'. The 'Capital Account' contains details of the inward and outward flows of capital and international grants and loans. Examples of such flows are external assistance, foreign (direct and PORTFOLIO) investments, subscription to Global Depository Receipts or EUROCONVERTIBLE BONDS and deposits of non-residents. Inflows on the capital account are helpful in financing a current account DEFICIT. Any gap that remains is covered by drawing on exchange or gold reserves, or by credit from the International Monetary Fund. Depending on the nature of imports, a deficit on the current account indicates an excess of investment over domestic saving in an economy. So long as this deficit is kept in check (evaluated as a percentage of the CROSS DOMESTIC PRODUCT), the DEBT SERVICE RATIO would remain within manageable limits. A challenge posed to India some years ago was the upward pressure on the Rupee's exchange rate in the wake of large capital account inflows. So, to maintain the competitiveness of India's exports, the Reserve Bank of India (RBI) resorted to purchases of foreign exchange. However, this has also caused money supply to increase, and the RBI has had to 'sterilize' such monetization by raising the CASH RESERVE RATIO or by engaging in OPEN MARKET OPERATIONS. Balance Sheet A statement of the financial position of an enterprise, as on a certain date, and in a certain format showing the type and amounts of the various ASSETS owned, LIABILITIES owed, and shareholder's funds. Bank Guarantee The financial guarantees and performance guarantees issued by banks on behalf of their clients. A financial guarantee assures repayment of money. (e.g. an advance received on an electrification contract), in the event of non-completion of the contract by the client. A performance guarantee provides an assurance of compensation in the event of inadequate or delayed performance on a contract. A deferred payment guarantee promises payment of installments due to a supplier of machinery or equipment. Bank Rate The rate of interest charged by the Reserve Bank of India (RBI) on financial accommodation extended to banks and FINANCIAL INSTITUTIONS. The support is provided in the form of a bills rediscounting facility and advances or REFINANCE against specified

ASSETS (e.g. TREASURY BILLS and DATED SECURITIES) or PROMISSORY NOTES. The intent behind changing the Bank Rate at certain junctures is to raise or lower the cost of funds that banks obtain from the RBI. This, in turn, would alter the structure of banks' interest rates and thereby serve to curb or encourage the use of credit. However, the Bank Rate is a relatively passive instrument of credit control. In the wake of the East Asian currency crisis, the RBI used the Bank Rate in conjunction with the CASH RESERVE RATIO and other measures to stabilize the exchange rate of the Rupee. In recent times, it has been RBI's endeavor to make the Bank Rae and effective signaling device as well as a reference rate. However, since frequent changes in the Bank Rate may be undesirable, the short-term REPOS interest rate seems to be a useful supplement in influencing the flow and cost of funds in the short term. Bear A person who expects share prices in general to decline and who is likely to indulge in SHORT SALES. Bear Market A long period of declining security prices. Widespread expectations of a fall in corporate profits or a slowdown in general economic activity can bring about a bear market. Beta (b) A measure of the volatility of a stock in relation to the market. More specifically, it is the index of SYSTEMATIC RISK, indicating the sensitivity of return on a security or a PORTFOLIO to return from the market. It is the slope of the regression line, known as the CHARACTERISTIC LINE, which shows the relationship of an ASSET with the market. For measuring market returns, a proxy such as a broad-based index is used. Thus, if b exceeds 1, the security is more volatile than the market, and is termed an 'Aggressive Security'. For example, a beta of 1.3 implies that a security's return will increase by 13 percent when the return from the market goes up by 10 percent. An asset whose beta is less than 1 is termed a 'defensive security'. Based on this, an aggressive growth strategy would be to invest in high beta stocks when the market is poised for an upswing; similarly, a switchover to low beta stocks is recommended when a downswing is imminent. Bills of Exchange A credit instrument that originates from the creditor (drawer) on which the DEBTOR (drawee) acknowledges his LIABILITY; after such acceptance, the drawer may get the bill discounted, so as to realize the proceeds immediately. As an illustration, consider the following : Hindustan Rasayan, a supplier of chemicals, draws a 90- day bill of Rs.6,20,000 on Indian Parma Corporation (drawee) directing the drawee to make payment at the end of 90 days to or to the order of Pyramid Finance Limited (payee). After the drawee accepts the bill, it is discounted with Pyramid Finance at a DISCOUNT RATE of 20 percent per annum. Hindustan Rasayan thus receives 6,20,000 x (1 – (90/365 x 20/100)) = Rs.5,89,425

The effective interest rate works out to 21 percent : 6,20,000 – 5,89,425 365 ------------------------------5,89,425 90 Blue Chip A share of a company that is financially very sound, with an impressive track record of earnings and DIVIDENDS, and which is highly regarded for its competent management, quality products and/or services. Examples in India are Hindustan Lever, Gujarat Ambuja Cements, and Reckitt & Colman among others. Bond A long-term debt instrument on which the issuer pays interest periodically, known as 'Coupon'. Bonds are secured by COLLATERAL in the form of immovable property. While generally, bonds have a definite MATURITY, 'Perpetual Bonds' are securities without any maturity. In the U.S., the term DEBENTURES refers to long-term debt instruments which are not secured by specific collateral, so as to distinguish them from bonds. Bond Insurance A form for credit enhancement, which provides a financial guarantee on the obligations of a debt instrument. The purpose of credit enhancement is to increase the safety of debt securities. Apart from financial guarantees, other forms of credit enhancement include letter of credit, overcollateralization, etc. Overcollateralization involves the provision of additional assets as security. Bonus Shares The issue of shares to the shareholders of a company, by capitalizing a part of the company's reserves. The decision to issue bonus shares, or stock DIVIDEND as in the U.S., may be in response to the need to signal an affirmation to the expectations of shareholders that the prospects of the company are bright; or it may be with the motive of bringing down the share price in absolute terms, in order to ensure continuing investor interest. Following a bonus issue, though the number of total shares increases, the proportional ownership of shareholders does not change. The magnitude of a bonus issue is determined by taking into account certain rules, laid down for the purpose. For example, the issue can be made out of free reserves created by genuine profits or by share PREMIUM collected in cash only. Also, the residual reserves, after the proposed capitalization, must be at least 40 percent of the increased PAID-UP CAPITAL. These and other guidelines must be satisfied by a company that is considering a bonus issue. )See also MARKET CAPITALIZATION.) Book Building A process used to ascertain and record the indicative subscription bids of interested investors to a planned issue of securities. The advantages of this technique of obtaining advance feedback, are that it results in optimal pricing and removes uncertainty regarding mobilization of funds. The concept of book building is alien to India's PRIMARY MARKET; so, towards the end of 1995, efforts were under way, to introduce this mechanism as an option in the case of large issues (minimum size: Rs.100 crore). An issue was divided into a 'Placement Portion' and another termed 'Net Offer to the Public'. For the Placement Portion, the exercise of book building enables the issuing company to interact with institutional and individual investors, and collect

The break-even volume is computed by dividing the fixed costs (FC) by the difference between the selling price per unit (SP) and variable cost per unit (VC). On the other hand. the process has been used in India to place debt securities as well. VC is Rs.000/(85-60) = 160 units of output. The intent on the part of the buyer is to offload the securities later in the market at a profit. there could be some disadvantages to the issuer such as interference by the INSTITUTIONAL INVESTOR or restrictive CONVENANTS in the initial subscription agreement. bears the risk of capital loss due to a fall in the price of the securities. There are some other aspects of book building arising from the guidelines issued by the Securities and Exchange Board of India. the route is another avenue for investing funds. which must see through a gestation period before tapping the PRIMARY MARKET. Break-even Point The point where the revenues from a business operation equal the total costs (FIXED COSTS = VARIABLE COSTS).85.particulars of the number of shares they would buy at various prices. However. a profit accrues when revenues exceed the break-even point. Interestingly. Bought-out deals are commonplace in issues of the Over the Counter Exchange of India (OTCEI). This syndicate. The break-even point in terms of revenues can be determined by dividing the fixed costs by the contribution margin ((SP-VC)/SP).600 which equals the revenues at 160 units. MUTUAL FUNDS and others. if FC is Rs. the institutional investor or the sponsor in OTCEI deals. after a company pays off all LIABILITES including PREFERENCE SHARES from the sale proceeds of all its ASSETS liquidated at BALANCE SHEE values. comprising FINANCIAL INSTITUTIONS. contacts prospective investors in order to elicit their quotes.000. Bought-out Deal The sale of securities under a negotiated agreement between an issuer and the investing institution. 4000 ((85-60)/85) = Rs. For institutions and MUTUAL FUNDS.4. for large issues as defined above.13. A change brought about in 1997 was that the book building process could be applied to the extent of 100 percent of the issue size. as an alternative to a PUBLIC ISSUE. It is a big help to unlisted companies and projects. who prepares a schedule of the size of orders at different prices. Bridge Loan A short-term loan granted to a borrower to tide over a temporary funds shortage. The advantage to the issuing company is the saving in time and cost that a public issue would entail. . The procedure is carried out by a lead manager to the issue. It commences with the circulation of a preliminary PROSPECTUS and an indicative price band. Thus. for the purpose of forming a syndicate of underwriters. in turn. Thus. the break-even volume is 4.60 and SP is Rs. For instance. the company and the merchant bankers decide the issue price and underwriting particulars. Book Value It is the amount of NET ASSETS that would be available per EUQUITY SHARE. called the 'Book Runner'. These quotes are forwarded to the book runner. After receiving a sufficient number of orders.

The more stringent requirements relating to the Cash Reserve Ratio from January 1995. this explains the sudden but short-lived jumps in the call money rate. the participation of non-banks in the call/notice money market is to cease by the end of 1999. has also forced banks to borrow short-term. perhaps because they have invested a large amount in other ASSETS.. Moreover.e. the RBI intends to make the call money/notice money/term money market into a purely inter-bank market. It is reflected in the variability of profits before interest and taxes. Incidentally.Such an accommodation is usually arranged at the time of a PUBLIC ISSUE. Bull A person who expects share prices in general to move up and who is likely to take a long position in the stock market. loans and investments as a cushion against probable losses in . The situation arises when banks face an unforeseen shortfall in funds. similarly. and others in dematerialized form. DFHI is also an active intermediary in the call money market. Ultimately. FIXED COST versus VARIABLE COST). e. Call Money A term used for funds borrowed and lent mainly by banks for overnight use. usually one year. This is a market. Besides. Budgets could be distinguished on the basis of time span. function and flexibility. Capital Expenditure Budgets and other to cover different functions. which banks access in order to meet their reserve requirements or to cover a sudden shortfall in funds and the interest rate is determined by supply and demand conditions. which stems from factors such as the cost structure of a venture (i. this measure also provides these entities a facility for parking short-term funds. Capital Adequacy Ratio A requirement imposed on banks to have a certain amount of capital in relation to their ASSETS. the REPOS market is being widened and developed for the benefit of non-bank participants. Accordingly. thereby necessitating a bridge loan. intra-industry competition. Incidentally.g. High call money rates are an indication of such a mismatch or of a deliberate policy to substantially borrow short-term and lend longterm. Further. using the excess security holdings. and government policies. who may be permitted to do repos deals (i. Cash Budgets. the underlying eligible securities will include PSU BONDS. borrowing funds) as well. An alternative source for banks would be to do REPOS deals with the Discount and Finance House of India (DFHI) or Securities Trading Corporation of India (STCI). For instance. corporate BONDS. GOVERNMENT SECURITIES and loans or due to heavy withdrawals by depositors for different reasons. 1995 to permit private sector MUTUAL FUNDS to lend in the call money/NOTICE MONEY/BILL REDISCOUNTING market may alleviate the situation considerably.. Business Risk The risk of business failure. The announcement by the Reserve Bank of India (RBI) in April. budgets may be short-term or long-term.e. i.e. Its primary purpose is to achieve financial control. with the additional involvement of Primary Dealers.. Budget A financial plan that projects receipts and payments of an entity covering a specific period of time. though. there are Sales Budgets.. certain FINANCIAL INSTITUTIONS and corporate entities (through PRIMARY DEALERS) have also been permitted to participate as lenders. when expenditures on a project lead to a DEFICIT. particularly the severe penalty for default.

it is zero on government guaranteed assets. whereas Tier II includes revaluation reserves. Thus. to take effect from March 31. Subsequently. the Government of India has injected several thousand crore rupees in the last few years. a bank must have Rs. according to the model. hybrid capital and subordinated debt. the component of risk which cannot be neutralized through DIVERSIFICATION. (Risk weights on GOVERNMENT SECURITIES are being introduced. in accordance with the standards of the Bank for International Settlements (BIS). this means that for every Rs. according to which. Capital Asset Pricing Model (CAPM) A theoretical construct. the expected rate of return is related . The risk weightage depends upon the type of assets. capital adequacy norms have also been announced for term-lending institutions and NON-BANKING FINANCIAL COMPANIES. The capital risk-weighted assets ratio system introduced by the Reserve Bank of India (RBI) in 1992. Tier II capital should not exceed Tier I capital. To shore up the capital position of public sector banks. Tier I comprises share capital and disclosed reserves. had set the deadlines indicated and loans. that is. This can be expressed as : Expected rate of return – Risk-free rate of return + Risk premium Further. the model suggests that the prices of ASSETS are determined in such a way that the RISK PREMIUMS or excess returns are proportional to systematic risk. as well as the accumulation of GOVERNMENT SECURITIES should be seen in this perspective. Capital is classified into Tier I or Tier II. developed by William Sharpe and John Lintner. In simple terms. Accordingly.100 of risk-weighted assets. For example. 20 percent on short-term bank claims on 100 percent on private sector loans. RBI had to extend the deadline in some cases up to March 1997. The impact of this system on Indian banks was reflected in the increased demand for capital and changes in the composition of assets. which is indicated by the BETA coefficient. 2000. a security's return is directly related to its SYSTEMATIC RISK. X in the form of capital. Further. See also NARASIMHAM COMMITTEE (1998). the relationship Risk Return on Risk-free (Beta of premium market portfolio return security) Determines the risk premium. The trend of fund-raising by banks through equity and other issues.) The capital adequacy ratio is percentage of total capital funds to the total risk-weighted assets. This infusion is reflected in the banks' investment in Government BONDS known as 'Recapitalization Bonds'. Institutions Foreign banks operating in India All other banks Norm Date 8% 8% 31-Mar-93 31-Mar-95 31-Mar-96 Indian banks with branches abroad 8% The ratio is being raised to 9%. Incidentally.

Central Bank The premier bank in a country that discharges the responsibilities of issuing currency. RBI. Upward revision on interest rates on TREASURY BILLS and GOVERNMENT SECURITIES. In India. maintaining the exchange value of the domestic currency. under the chairmanship of Raja Chelliah. and also acts as a banker to the Central and State Governments. This relation is portrayed by the SECURITY MARKET LINE. Chakravarty Committee A committee set up by the Reserve Bank of India (RBI). However. superintendence and regulation of the commercial banks. the Reserve Bank of India (RBI) is the Central Bank. etc. 2. Besides this. carries out the duties mentioned above.. MONETARY TARGETING as a policy tool. Chelliah Committee A committee on tax reforms constituted by the Government of India in 1991. Capital Reserves The reserves created in certain ways. the committee made several recommendations to reform the financial system including : 1. Chakravarty to appraise the working of the monetary system and suggest measure for improving the effectiveness fo monetary policy in promoting economic development. are computed as a percentage of a bank's net demand and time LIABILITIES. to be maintained over a fortnight. customs and excise duties. When lending and borrowing possibilities are considered. Among its numerous suggestions aimed at improving revenue buoyancy and simplicity are the following : . i. Its recommendations encompass the areas of corporate the beta coefficient. The reserves. managing MONEY SUPPLY by appropriate measures in order to maintain price stability and economic growth. under the chairmanship of S. Banks earn interest on eligible cash balances thus maintained and it contributes to their profitability. it also manages the public debt. 3. These amounts are regarded as not available for distribution as DIVIDENDS. Capital Market Line This is a graphical line which represents a linear relationship between the expected return and the total risk (standard deviation) for efficient PORTFOLIOS of risky and riskless securities. Removal of ceilings on interest rates on bank loans to the non-priority sectors and on call loans. that include the sale of FIXED ASSETS at a profit. Cash Reserve Ratio (CRR) A legal obligation on all SCHEDULED COMMERCIAL banks excluding REGIONAL RURAL BANKS to maintain certain reserves in the form of cash with the Reserve Bank of India (RBI). therefore. that is. fund-raising programmes of the government. and hence these outflows need to be moderated if the situation so demands. and personal income taxes. such interest payment tends to attenuate monetary control.e. the capital market line becomes the EFFICIENT FRONTIER starting from the riskless rate for the point of tangency on the efficient frontier of portfolios. In its report submitted in April 1985. controlled increase in money supply to maintain price stability while facilitating increase in real output. Selling marketable securities to the public (instead of the RBI) at attractive YIELDS would avoid the excessive creation of money. An alternative that has been suggested is to fix a lower level of reserves and pay a modest interest.

The member is selected either by lot or through an auction. Examples are Mastershare and Ind Ratna. and the paper must have a CREDIT RATING of P2. asset classification. which is then disbursed as a loan to a member. Like other MONEY MARKET instruments. B. it is issued at a DISCOUNT on the FACE VALUE and is freely marketable. A2 or PR-2. Closed-end Fund A scheme of an investment company in which a fixed number of shares are issued. 2. telephone services and insurance contracts among others. To administer lending under method II of the TANDON COMMITTEE norms. The issuing company must have a certain minimum tangible NET WORTH. Simplification of the excise duty structure and a move towards a Value Added Tax (VAT) system covering commodities and services. Establishment of a discount house in India. in 1979. contractors. banks should appraise and fix separate limits for the normal level and for peak level needs.1. transport operators and others. to achieve the stated objective. Commercial Paper may be issued to any person including individuals. The group headed by K. to review the operation of the CASH CREDIT SYSTEM. banks and companies. the extent of CP that can be issued by all eligible . 4. 4. 5. 3. The Reserve Bank of India (RBI) has laid down certain conditions regarding issue of CPs. Simplification of the Quarterly Information System (QIS) and penalty for delay in submitting the reports. the rating must not be over two months old at the time of issue. Moreover. etc. The funds so mobilized are invested in a variety of vehicles including shares and DEBENTURES. A chit fund scheme typically involves the collection of periodic subscriptions from enrolled members.. 2. Introducing of the system of 'Presumptive Taxation' for groups such as small traders. Reduction of the corporate tax rate on domestic companies progressively to 40 percent. The promoter is also called the 'Foreman' and the capital given out is called 'Prize Money'. Commercial Paper (CP) A short-term. Substantial reductions in import tariffs and excise duties in a phased manner. 3. to suggest improvements in the same. working capital limit. unsecured PROMISSORY NOTE issued by BLUE CHIP companies. e. as well as supply and demand for the fund's shares. as well as to propose alternative types of credit facilities in order to ensure greater discipline and a more productive use of credit. capital appreciation for a GROWTH FUND or current income for an INCOME FUND. Chore Committee A working group appointed by the Reserve Bank of India (RBI). investors may buy shares of the fund from the secondary market. After the issue. From November 1996. In assessing credit requirements.g. Chit Fund This is a non-banking financial intermediary. Chore of the RBI made several recommendations including : 1. Levying taxes on the service sector to cover stock-brokers. The value of these shares depends on the NET ASSET VALUE of the fund.

Cost of Goods Sold Alternatively called the Cost of Sales. suppliers. the Kabra Committee in 1994 recommended that futures trading be permitted in several other commodities including rice. DEBENTURES/BONDS. utilities. As for restoration of the limit consequent on redemption of CP. The total input costs include materials used.. working together as a joint venture. at a price agreed to.V. soybeans. Good corporate governance would be reflected in generally good performance. employees. financing and dividend payment. Gupta has recommended that Indian corporates be allowed to hedge in offshore futures and OPTIONS markets in a phased manner. clean business practices. in an interesting development. PREFERENCE SHARES. and other manufacturing expenses including . it is the sum of total input costs associated with a certain quantity of goods sold. In business. Contracts on certain commodities such as pepper and coffee are already traded in India. though possible. sharing resources and having interlocking financial agreements. The term. banks have been given freedom to decide on the manner of doing so. which will enhance shareholders' wealth. Cost of Capital The weighted average cost for long-term funds raised by a company from different sources such as term loans. Hence it calls for ethics. Contingent Liabilities The liabilities that may arise as a result of some future event which. cotton. Corporate Governance connotes the importance of responsibility and accountability of a company's management to its shareholders and other stakeholders. a court judgement on a pending lawsuit may impose a financial payment on a company. the term applies to a group of companies. Soya bean and castor oil. Further. Moreover. sugar or copper) on a specified future date. morals and good practices in running a company. improved disclosure and sound policies relating to capital expenditure. (See also Appendix II).corporates has been raised to 100 percent of the working capital credit limit. These contracts are standardized in terms of quantity. such as WORKING CAPITAL or a term loan. direct and indirect labour. national or international. a committee appointed by the Reserve Bank of India under the chairmanship of R. Corporate Governance The manner in which a company is managed. The committee submitted its report in November 1997. customers and the local community. EQUITY SHARES and retained earnings. quality and delivery months for different commodities. at the time of the transaction. is deemed unlikely. for example. Commodity Futures A standardized contract guaranteeing delivery of a certain quantity of a commodity (such as wheat. viz. Consortium A term generally used in banking: it refers to a group of banks associating for the purpose of meeting the financial requirements of a borrower.

International rating agencies also undertake sovereign rating. Besides. Credit rating relates to companies. For this privilege. the purchaser pays a cost termed PREMIUM. CIRSIL. such formal evaluation with the aid of quantitative and qualitative criteria. the management. This type of information is useful to consumer credit firms Cross Currency Option An instrument that confers a contractual right on the purchaser of the OPTION to buy (call) or sell (put) a currency against another currency.g.S. Yen for U. STRUCTURED DEBT OBLIGATIONS and securitized debts. for performance guarantees. dollar. individuals and even countries. Incidentally. regulatory environment. The methodology is to examine key factors like the business. the STRIKE PRICE is the contracted exchange rate at which the option buyer buys or sells a currency. Credit Rating The exercise of assessing the credit record. culminates in the assignment of a letter rating to the security. competition and fundamental aspects including the financial position.. till a few years ago. This service is already offered by Indian rating firms. etc. (introduced in India in January 1994) as .e. the terminology applicable to cross currency options is similar to the one for stock options. FIXED DEPOSIT OR COMMERCIAL PAPER. The rate may be fixed or it may be floating in relation to some benchmark. calls it Credit Assessment. and Credit Analysis and Research (CARE). The rating represents in rating agency's opinion at that time on the relative safety of timely payment of interest and principal associated with the particular debt obligation. ICRA. For instance. This opinion rests on the agency's assessment of the willingness and capability of the issuer to meet the debt obligations. performance ratings can now be obtained by real estate developers and LPG bottlers. e. a general credit rating service not linked to any debt issue may be availed of by a company. issuers have fixed their coupon rates by taking into consideration. It is expected that ratings will soon be extended to chit funds and MUTUAL FUNDS. A high credit rating can help in reducing the interest cost and also facilitate placement of the debt security. i. The instrument could be a DEBENTURE. The rating agencies in India are Credit Rating and Information Services of India Limited (CRISIL). The advantages with a cross currency option.DEPRECIATION. market perceptions and expectations. Credit appraisal also covers individuals. coupon rates were subject to a ceiling stipulated by the Controller of Capital Issues. integrity and capability of a prospective borrower to meet debt obligations. This rating can be used in negotiations with new bankers. of countries. for example. In India. A recent development in India is the rating of fixed deposits of banks. Moreover. In the case of a company's debt instrument. With the removal of the ceiling. Coupon Rate It is the rate of annual interest on the PAR VALUE of DEBENTURES or BONDS that an issuer promises to pay.

) Debenture Redemption Reserve (DRR) The term is given to the reserves that are to be compulsorily created by companies for the express purpose of retiring DEBENTURES issued by them whose MATURITY exceeds 18 months. the general norms for this liquidity ratio is 1. While appraising loand requests. The operating cycle is the time taken for the sequence of events from the purchase of raw materials to the collection of cash from customers for goods sold. DEBENTURE REDEMPTION RESERVE and DEBENTURE TRUSTEE. if raw materials are bought on credit. Examples include accounts and PROMISSORY NOTES payable. (See also TRUST DEED. These are mainly LIABILITIES on account of purchase of materials or services rendered to the firm. the maximum possible loss. becomes known to the option buyer at the outset.33 Debenture A debt security issued by companies. a cross currency option may be preferable to a FORWARD CONTRACT. short-term investments particularly MONEY MARKET securities. when the direction of a currency's movement is uncertain. moreover. Examples of current assets are cash. However. Debentures may be unsecured or secured by ASSETS such as land and building of the issuing company. as well as taxes and loan repayments falling due within the year. work-in-process. the reserves (DRR) must cumulate to 50 percent of the amount of debentures issued. (See also BOND. lending institutions ascertain the debt servicing capacity from financial projections submitted. raw materials. Debenture Trustee The third party to a DEBENTURE issue. by computing the ratio of cash accruals plus interest payments (on term loans) to the sum of interest and loan repayments : DSCR = Profits after taxes – DEPRECIATION + Interest charges Interest charges + Loan repayments . it is also known as the 'Cash Conversion Cycle'. Current Assets The assets which are expected to be converted into cash or consumed during the 'Operating Cycle' of a business. It is computed from a BALANCE SHEET by dividing CURRENT ASSETS by CURRENT LIABILITIES. In India. having a certain MATURITY and bearing a stated COUPON RATE.compared to forward and futures deals are that the option buyer is under no obligation to exercise the right. Debenture holders have a prior claim on the earnings (coupon) and ASSETS in the event of liquidation. it at all. as compared to PREFERENCE and equity shareholders.) Debt Service Coverage Ratio (DSCR) A ratio used to assess the financial ability of a borrower to meet debt obligations. Thus. finished goods. Current Ratio This ratio is a measure of a company's ability to pay its short-term debts as they become due. Current Liabilities The claims against a company that will become due within a year. and ACCOUNTS RECEIVABLE. then the cash conversion cycle is shorter than the operating cycle by the period of credit available. Hence. The role of the trustee is that of a watchdog who acts on behalf of the debenture holders. pledges and restrictions relating to the DEBENTURE issue. with whom the TRUST DEED is executed and who must ensure that the issuer abides by the promises. Before redemption commences.

securities in physical form are destroyed. it refers to the excess of expenditure over revenues during a certain period. depository participants. Thus. it was proposed that a high-level. 'Expenditure Management and Reforms Commission'. Capital expenditure includes loans and advances to states and public sector units. 'immobilized' under the system. the revenue deficit is a good indicator of whether the government is living within its means. by NET WORTH.. SUBSIDIES. In the context of a BUDGET. as funds are diverted to current expenditure. However. and is worked out by dividing total debt. Deficit In general. as described below : Revenue Deficit The excess of expenditure over receipts in the revenue account fo the Government of India. pensions etc. the creation of productive ASSETS decelerates. The budget deficit is financed through the issue of Ad hoc TREASURY BILLS and/or by drawing down cash balances with the Reserve Bank of India. A depository performs the functions of holding. This is because the scrips are 'dematerialized' or alternatively. and capital outlay. Budget Deficit The figure that results by subtracting the total expenditures (on revenue and capital accounts) from the total receipts (on revenue and capital accounts) of the Government of India. Deflation A phenomenon of falling prices in an economy. certain defense outflows. be appointed to tackle the issue of public expenditure management and control concerning the Central Government. revenue receipts include tax and non-tax revenues. it connotes a shortfall. proceeds from the sale of government assets and borrowings other than through Treasury Bills. In the Union Budget 1996-97. salaries. transferring and allowing withdrawal of securities through its agents viz. This arrangement enables a transfer of shares through a mere book-entry rather than the physical movement of certificates. Receipts include taxes and non-tax revenues such as interest and DIVIDENDS and also grants. The recent phenomenon of high levels of revenue deficit financed by borrowings to meet consumption expenditure has ominous implications. It is a structural ratio that gauges the level of debt financing. Some fo the expenditure items are interest. As mentioned above. there are specific measures of deficit used in India for a financial year. which may be due to a contraction in MONEY SUPPLY. For settlement of trades done at an exchange. Depository A system of computerized book-entry of securities. Debt-Equity Ratio This ratio is used to analyze FINANCIAL LEVERAGE. The denominator would comprise total equity of common stockholders and PREFERENCE capital. Capital receipts comprise recovery of loans. Under dematerialization. short-term and long-term. Whereas outflows on account of interest charges and loan repayments will go up. whereas under . the depository interacts with a clearing corporation which oversees the payment of funds and delivery of securities.The figures in the numerator and denominator are typically aggregated for 10 years in working out the DSCR.

is allocated as a periodic expense.immobilization. on a future date at a predetermined price.S. The term also means the amount of expense determined by such a process.. Sometimes. .41. it means that the dollar has depreciated vis-à-vis the Indian rupee. BONDS. With exchange-traded derivatives. and declining investment in plant and equipment on account of falling sales. if one U. The system of maintaining ownership records in the form of electronic holdings will help to eliminate problems that are associated with physical certificates such as fake/torn certificates and loss in transit. it is called AMORTIZATION when the ASSET is intangible or 'depletion' when the asset is a natural resource. dollar could be bought in the market for Rs. This contract binds the parties to exchange a debt security against payment e.g. Derivatives traded at exchanges are standardized contracts having standard delivery dates and trading units. debt instruments. equities or commodities. currencies or stock indices. OTC derivatives signify greater vulnerability. There are different methods of depreciation such as the Straight Line Method and the Written Down Value (WDV) method. Depression An economic condition that is characterized by a severe contraction in economic activity. so as to restore securities to physical form.50 earlier. The value of the futures contract is governed by the value of the underlying Treasury Bill. Derivatives are traded at organized exchanges and in the over-the-counter (OTC) market. Further. the risk is controlled by exchanges through clearing-houses which act as a contractual intermediary and impose margin requirements. FORWARD CONTRACTS relate to foreign exchange. rematerialization is possible. widespread unemployment. spread over the depreciable life of the ASSET. an option confers the right without any obligation to buy or sell an asset at a predetermined price on or before a stipulated EXPIRATION DATE. For example. For example. there are fewer regulatory restrictions and this facilitates innovation. Derivative A financial contract that derives its value from another ASSET or an index of asset values. In numerous business shut-downs. OPTIONS derive their values from shares or stock market indices. the value of the futures contract will rise because the buyer has locked in a higher interest rate. futures to commodities.40 as against Rs. In the context of international finance. Moreover. the securities are stored away in vaults. which is manifested. SWAPS are agreements between two parties to exchange cash flows in the future according to a predetermined formula. and OPTIONS to equities. Depreciation An accounting process by which the cost of a FIXED ASSET. If yields decline. Interest-rate futures are tied to debt instruments. such as minerals. In contrast. A major difference between the two is that of counter party risk – the risk of default by either party. This would result in American goods and services becoming cheaper to Indians and Indian goods and services becoming more expensive to Americans. OTC derivatives are customized contracts that enable the parties to select the trading units and delivery dates to suit their requirements. These underlying assets maybe foreign exchange. TREASURY BILL. depreciation refers to the decline in the market value of a currency in relation to another currency. such as a building or machinery.

HEADGING. 3. it means the adjustment in security prices consequent to the assimilation of new information about a company. Discount Rate The interest rate used in calculating the PRESENT VALUE of future cash flows. The margin by which a security's market price is lower than its face value. Dhanuka to review securities related Acts. 2. An illustration is the increase in the price of a stock following the news of the company bagging big sale orders. Direct Taxes Taxes whose impact and incidence are on the same person. GUPTA COMMITTEE are implemented shortly. Some of its recommendations as gleaned from press reports are : 1. 2. India may soon see the introduction of exchange-traded derivatives on stock indices and other financial assets if the recommendations of the L. The exemption from payment of stamp duty that is available to beneficial owners of dematerialized shares should also be extended to transfer of shares in physical form. so that exports compete more favorably in the overseas markets. or news in general. Reduction in the sale price of goods. set up by the Securities and Exchange Board of Indian (SEBI) in March 1997.C. 3. In security analysis. 5. Devaluation is the opposite of REVALUATION. trading in derivatives has registered a phenomenal growth in the Western financial markets. and wealth tax are instances of direct taxes. Discount This refers to : 1. Diversification The process of spreading out investments so as to limit exposure and reduce risk. regulations and rules. Disinvestments The sale of shareholding by an individual or institution in order to raise cash. Companies making a public issue of over Rs. 4.With their universal recognition as risk-management tools. R. Devaluation The lowering of a country's official exchange rate in relation to a foreign currency (or to gold). The relationship with other assets and certain other features makes derivatives useful for SPECULATION. Self-regulatory organizations in the financial sector such as AMBI and AMFI must register with SEBI. The MUTUAL FUND and collective schemes of the Unit Trust of India (UTI) must come under the purview of SEBI. ARBITRAGE and PORTFOLIO adjustments. . the SEBI Act must prevail over the UTI Act.10 crore should use the DEPOSITORY option. (See also DEPRECIATION) Dhanuka Committee A committee headed by Justice D. The taxes levied on income. In case of differences.

in order to conserve resources. Therefore. by the number of equity shares outstanding. Dividend The payment made by a company to its shareholders. offload surplus stocks or a predatory intent of killing foreign competition. Companies achieve diversification by venturing into new and unrelated business areas. FIXED DEPOSITS and other investment vehicles. Total equity includes reserves and shares PREMIUM. which together are deployed in various ASSETS such as land. Economic Value Added (EVA) A tool for evaluating and selecting stocks for investment. an improvement in EPS does not necessarily indicate a more productive use of the total amount of funds available with a firm. Dumping The sale of goods in a foreign market at a price that is below the price realized in the home country. receivables and cash. Earnings Per Share (EPS) The net profits of a company expressed on a per (EQUITY) SHARE basis. An American consultancy firm.S. if any.Individuals do this by investing in shares of different companies or by combining stocks with DEBENTURES. INVENTORIES. EVA expressed on a per share basis facilitates comparison between companies. a scheme . after allowing for all costs of transfer including transportation charges and duties. It is calculated by subtracting the total cost of capital from the after-tax operating profits of a company. Legal and financial considerations have a bearing on the level of dividend to be paid. Stern Stewart is credited with the development of this tool in the late eighties. for which an appropriate OPPORTUNITY COST must be considered. so also. These averages are summary measures of stock prices in the U. dividends may be paid out of profits alone. the better. The cost of capital is the composite cost of total equity and debt. machines. MUTUAL FUND shares. it does not reveal the potential impact of dilution in earnings on account of securities such as convertibles or warrants that may be outstanding. The motive may be to enhance revenues. and also used as a measure of managerial performance. It seeks confirmation of whether a longterm market advance or decline is under way. a growing company needs funds to finance its expansion and hence may pay only a modest dividend. Moreover. A positive EVA is deemed to be a good sign and the higher it is. buildings. For instance. EVA = After-tax Operating Profits – Total cost of capital Operating profits simply mean earnings before interest and taxes. EEFC Account This refers to the Exchange Earners' Foreign Currency Account. Dow Theory A theory to ascertain the emergence of a primary trend (a trend which indicates either a bullish or bearish phase) in the stock market. by examining the movement of the Dow Jones Industrial Average in conjunction with the Dow Jones Transportation Average. It is arrived at by dividing the figure of profits after taxes and DIVIDENDS paid on PREFERENCE SHARES.

Escrow Cash. This symbolic indicator conveys the agency's opinion on the relative quality of equity being offered. risk and financial strength associated with the issuer. ICRA Limited. The escrow mechanism is a technique of mitigating the risk to lenders and it is used typically in infrastructure projects such as power. For example. which reflect its managerial competence. etc. It takes into account the earning prospects. competition. It takes into account the earning prospects. Equity Share A security that represents ownership interest in a company. The agency also offers the service of Equity Assessment. an escrow account can be set up at a bank for depositing the . securities or other valuable instruments that are held by a third party to ensure that the obligations under a contract are discharged. There are 12 grades starting with ERAI (signifying excellent earning prospects with low risk) and ending with ERD3 (representing poor earning prospects and high risk). The share of a public limited company can be subsequently sold through stock exchanges or other forums. It is issued to those who have contributed capital in setting up an enterprise. DIVIDEND on equity shares is paid after meeting interest obligations and dividends to PREFERENCE shareholders. on the basis of its in-depth study of the company and all relevant factors. industry outlook. at the request of the prospective issuer. etc. equity shareholders expect handsome returns by way of DIVIDENDS and price appreciation of the share. (See also MARKOWITZ MODEL. An alternative term that is sometimes used is 'COMMON STOCK' or simply. no other portfolio provides superior returns. roads or telecom. Apart from a PUBLIC ISSUE. At that level of RISK. they are also known as 'residual owners'. equity shares may originate through an issue of BONUS SHARES. CONVERTIBLE securities.introduced in 1992 for exporters and residents receiving foreign exchange. For example. WARRANTS. when their enterprise performs well. at the request of the prospective issuer. follows all others. 'STOCK'. ICRA Limited. The claim of equity shareholders on earnings and on ASSETS in the event of liquidation. industry outlook. which is at the request of an investor. It is the optimum size of order which minimizes the cost of purchasing and holding inventories. A certain percentage of the earnings may be maintained in this account in order to limit exchange rate risk in case of future imports or for other specified purposes. credit rating agency. GDRS. This symbolic indicator conveys the agency's opinion on the relative quality of equity being offered. under which the agency assigns a grade to an equity issue. a term that relates to INVENTORY management. risk and financial strength associated with the issuer. This appraisal is a one-time exercise and is in the form of a report that is intended to help investors in their investment decisions. competition.) EOQ The acronym for Economic Order Quantity. which reflect its managerial competence. Equity Grading A service offered by the credit rating agency. For bearing such risk. Combining shares from different unrelated industries helps to neutralize the UNSYSTEMATIC RISK inherent in each security. Efficient Portfolio A diversified selection of stocks resulting in a least risk PORTFOLIO for a given rate of return. etc. under which the agency assigns a grade to an equity issue. Hence. on the basis of its in-depth study of the company and all relevant factors.

2. Euro issues must conform to the guidelines issued by the Central Government. There are two basic components to the charges levied by a factor: interest or DISCOUNT charge and service fee. Among other thing. 4. 3. Examples include expropriation of properties by a foreign government or gains from refunding a BOND issue. it will compete with the US dollar as a reserve currency. The agency. 5. besides the common currency. for a profit or loss to a company resulting from an unusual and rare occurrence or event. More specifically. Eurobond A bond denominated in a currency different from that of the country in which it is sold. processing and collecting the . the service commission is for bearing risk.. bears the responsibility and attendant RISK of collecting the dues from the company's customers. i. a firm's sales to different customers must have prior approval of the factor. generally without recourse. prior permission for an issue must be obtained from the Ministry of Finance. Efficient pricing that maximizes mobilization. Typically. Euro The common European currency that will come into being with the formation of the European Union. Inflow of foreign currency funds. Reduced cost of capital owing to lower interest rates and floatation costs.payments of electricity bills. Whereas the interest rate depends on the cost of money and competition among factors. No immediate dilution of voting control. The advantages associated with Euro issues are : 1. a factor pays up to 80 percent of the invoice value to its client (firm) upon receipt of the copy of the invoice relating to goods delivered. Greater visibility due to international exposure. The circulation of the Euro is slated to take place in 2002 and it is expected to emerge as an important international currency. Euro Issue An issue of securities to raise funds outside the domestic market.S.e. Extraordinary Item An accounting term in the U. the factor may follow up with the customer after furnishing the details of receivables. the factor. In order to ensure timely collection. Euro issues by Indian companies have been by way of GDRS or EUROCONVERTIBLE BONDS. The balance is paid after receiving the amount due from the firm's customer. This economic union has given birth to the European Monetary Union tht will be characterized by a common CENTRAL BANK and MONETARY POLICY. Factoring An arrangement for obtaining funds by selling receivables to a specialized financing agency (the factor). When factoring is contemplated. (See GDR and FOREIGN CURRENCY CONVERTIBLE BOND). Elimination of exchange rate risk and reduction of transaction costs between members are seen as major benefits of the common currency.

S. by the use . RCTD : Risk Capital and Technology Finance Corporation Limited. SCICI : SCICI Ltd.S. Financial Futures These are contracts guaranteeing delivery of specified financial instruments on a future date. They offer companies.receivables and handling the book-keeping. The task of debt collection is also considered to be a major impediment. as well as the Unit Trust of India (UTI) and the Life Insurance Corporation of India (LIC). Financial Leverage The ability to magnify earnings available to equity shareholders. Factoring is thus a financial package of credit. TDICI : Technology Development and Information Company of India Ltd. banks and institutions a means to insulate themselves from adverse interest rate movements through HEADING. The financial instruments traded in the U.. The main drawback with factoring is that it is usually very expensive. Treasury BONDS. The futures contracts on debt securities are commonly known as interest-rate futures. long-term U. That apart. a certain rate of interest for a given time period. The objective behind hedging is to establish in advance. Financial Institution A non-banking financial intermediary (company corporation or cooperative society) carrying on any of the activities specified in the relevant section of the Reserve Bank of India Act. etc. insurance and CHIT FUNDS. HIRE-PURCHASE. In general. However. TFCI: Tourism Finance Corporation of India Ltd. SFCs: State Financial Corporations. a more specific classification could be as shown below : SIDBI : Small Industries Development Bank of India. COMMERCIAL PAPER. investing in shares and other securities.g. These activities include lending. financial futures offer considerable profit potential which attracts speculators and individual investors too. at a predetermined price. Among the reasons why factoring has not caught on in India are competition from alternative sources of financing particularly bill DISCOUNTING as well as funds constraint and lack of credit information. this term refers to the Development Finance Institutions such as IDBI and IFCI. futures markets consist of foreign currencies and debt securities e. TREASURY BILLS. debt collection and sales ledger administration resulting in regular cash flows to companies whose credit sales comprise a significant portion of the total sales.

000 to 1.12. The impact of the use of debt becomes evident by comparing the EARNINGS PER SHARE (EPS) under different financing alternatives as shown below.000 equity shares of Rs. A simple illustration is shown below.40.100 par) Profits before interest and taxes (PBIT) Interest Profits before taxes(PBT) Taxes-50% 1. the degree of financial leverage. the chances of financial failure. at a given PBIT can be measured by the formula: Percentage change in EPS Percentage change in PBIT At PBIT Rs. The constituents of financial markets are shown below : . Hence DFL.500 Taxes (50%) EPS 53. Plan A : 0% debt.000 60. DFL = 56/50 = 1. a 50 percent increase in PBIT (from Rs.000 1.1.3. Generally.000 0 0 0 1.20.000 1.20.000 2. 1. the greater will be the impact on profits available to equity shareholders.000. in Plan B.500 13.80.of debt or fixed-charge securities.000 (3. The term connotes a vast forum rather than a specific physical location for trading activity.00.250 1.3.250 2536 39. thereby.13.250 83.000 EPS 20 30 40 Plan B : 30% debt at 15% interest per annum (2.000) results in a 56 percent increase in EPS.80.000 1.000 90.000 2.80.000 2.500 2. This is because an increase in debt raises fixed interest expenses and.200. since the firm using leverage attracts not only higher returns but a risk as well.500 1.06. other things being equal.000.20. leverage is a double-edged sword.26.00. For instance.100 par) Interest PBT 13.40.64 53.500 13. mostly in the form of tradeable securities.20.93 Financial Markets The transactions which result in the creation or transfer of financial ASSETS and LIABILITIES.20.500 1.000 1. The effect of financial leverage is that an increase in the firm's PBIT results in a greater than proportionate increase in its EPS. DFL = Though debt finance is tax-deductible. the higher the amount of debt in relation to total financing.100 shares at Rs.80.40. equity Rs.66. The Sparking Water Company has total assets of Rs.000 PBIT 1. and hence an attractive source of funds.

it may be viewed as a forum for adjusting their short-term LIQUIDITY positions. bank. Examples include DEBENTURES. Hence. These different instruments are listed below : Instrument Typical MATURITY (in days) CALL MONEY and NOTICE MONEY REPOS INTER-BANK TERM MONEY BILL OF EXCHANGE TREASURE BILL INTER-BANK PARTICIPATION CERTIFICATE CERTIFICATE OF DEPOSIT COMMERCIAL PAPER 91 TO 180 90 TO 364 30 TO 364 1 and up to 14 14 15 TO 90 90 91 AND 364 INTERCORPORATE DEPOSIT 90 The money market is useful to any entity. business or wealthy individuals having a temporary surplus or DEFICIT. whether a government. The open money market does not have any physical trading locations. the Reserve Bank of India plans to introduce screen-based trading system for this segment. However. The DISCOUNT AND FINANCE HOUSE OF INDIA LIMITED (DFHI) plays an important role as a MARKET MAKER in money market securities. It is essentially a network of the major players and intermediaries linked by telephones and other media. PREFERENCE .The Money Market is that segment of the financial markets wherein financial instruments having maturities of less than one year are traded. The Capital Market is that segment of the financial markets in which securities having maturities exceeding one year are traded.

FOREIGN CURRENCY CONVERTIBLE BONDS. Over-the-counter transactions refer to the trading in securities including shares. usually within a specified band. Floating Exchange Rate The exchange rate of a currency that is allowed to float. When interest rates and bond YIELDS go up. e.g. ports. the defense forces. Floating Rate Bond A debt security whose COUPON RATE is periodically adjusted upwards or downwards.) and are also required to ensure internal and external security. police. FOREIGN BONDS and private placement with Foreign Institutional Investors (FIIs). Fiscal Policy The use of tax and expenditure powers by a government. also termed 'Indexed Bonds'. The disadvantage is when rtes fall. the coupon is raised as indicated by the issuer. either within a narrow specified band around a reference rate. a nation's economic health.g. all of which bring inflow of foreign exchange. that goes on at places other than exchanges. government spending also contributes to aggregate demand for goods and services – directly. and indirectly by increasing private incomes which stimulates private demand. But. are vested with the task of creating infrastructure (e.. Over-the-Country Exchange of India (OCTEI) offerings may originate as a public issue or a BOUGHT-OUT DEAL. through its different arms. through the clearing system. Float The interval between the issuance of a cheque and its payment by the drawer's bank. An increase in government spending without a matching increase in inflows may cause or exacerbate a DEFICIT. Government all over the world. or totally freely according to market forces. the downward revision of the coupon would also preclude . EURO ISSUES and overseas offerings include GDRs. on the basis of a benchmark interest rate or an index. The time involved in clearing cheques through the banking system allows greater flexibility in cash management funds need not be deposited in an account as soon as a cheque is issued. etc. the Union Government collects income tax. These forces of demand and supply are influenced by factors. etc. because the bondholder's coupon receipts will fall. roads. Thus.. ADRs. such as. These securities. EXCISE DUTY. power plants.. interest rates and INFLATION. Moreover. were introduced to offer investors protection from INFLATION and INTEREST RATE RISK that are inherent in a DEBENTURE or BOND bearing a fixed coupon. customs duty. the administrative services and others. These responsibilities entail government expenditures on various fronts – capital outlays.shares and EQUITY SHARES. Taxes are a major source of revenue to meet these outflows. KERB DEALS or transactions at investors' clubs. trade performance and BALANCE OF PAYMENTS position.

until conversion. Therefore. in India. The BOND which bears a certain coupon enables the issuing company to economize on interest cost by tapping foreign markets and also to postpone a DILUTION in the EARNINGS PER SHARE. it serves to convert as sale of goods on credit into a cash sale. put and call OPTIONS may be attached to the instrument. The bonds carry a floating rate of interest for 3 percent over the bank's maximum term deposit rate.any CAPITAL GAINS by way of price appreciation..g. but without recourse to the exporter. For instance. That is. So. Moreover. In some respects. the CONVERSION PRICE and the exchange rate are fixed. Forfeiture It means the deprivation of shares held by an investor. the first such instrument was introduced by the State Bank of India in December 1993.. must be taken into consideration. the coupon rate will be adjusted at regular intervals of six months on January 1 and July 1 throughout the tenure of the instrument. In India e. usually as a consequence of . with a minimum coupon rate of 12 percent per annum. Subject to the rules prevailing. the depreciation cost.K. The put enables investors to sell their bonds back to the issuer. (See also EURO ISSUES and GDR. the exporter receives the proceeds on surrendering to the forfeiter. one dimension of FCCBs is that they add to India's external debt. The call allows the issuer to undertake REFINANCING or to force conversion. Foreign Currency Convertible Bond (FCCB) An unsecured debt instrument denominated in a foreign-currency and issued by an Indian company which is convertible into shares. the forfeiter bears the risk of default in payment by the importer. on the basis of the Wholesale Price Index. the endorsed debt instrument duly accepted by the importer and co-accepted by his bank. the exchange risk.) In December 1997. accruing to the holder. It amounts to DISCOUNTING receivables by a forfeiting company.) Forfeiting This refers to the sale of export receivables. the interest rate on the security is higher as compared to bonds of foreign companies. the interest is paid in foreign currency. at a predetermined rate. the forfeiter's fee depends on the country of the importer apart from the due date of payment. Capital Indexed Bonds of the Government of India were introduced. the issue costs are lower and the placement process is shorter. These bonds provide investors a complete hedge against inflation for the principal amount of investment. the fee for forfeiting bills accepted by an importer in Uganda could be higher than for an importer in U. Authorized Dealers in foreign exchange may also enter this business. Unless otherwise specified. Under this arrangement.e. redemption too will entail an outflow of foreign currency. or in some cases into GDRs. Incidentally. i. Therefore. If the option to convert is not exercised. Moreover. The advantage to the investor is the option of retaining the security as a bond till REDEMPTION. the EXIM BANK introduced forfeiting in 1992. if the stock does not rise to the desired level. an 'Alpine Convertible' bond (issued to Swiss investors) scores over others. (See also GOVERNMENT SECURITIES.

non-fund based services involve the issuance of LETTERS OF CREDIT. In contrast. LOAN SYNDICATION and advisory assistance. bill DISCOUNTING. . Forward Premium The amount by which a currency's forward rate exceeds the spot market rate. In India. Formula Plans These are mechanistic methods of timing decisions relating to the buying and selling of securities. Forward Contract A transaction which binds a seller to deliver at a future date and the buyer to correspondingly accept a certain quantity of a specified commodity at the price agreed upon. Examples include the CASH CREDIT facility. BANK GUARANTEES. ACCEPTANCE and fee-based services such as security issues management. The consequence of such substitution of 'floating debt' (TREASURY BILLS or WAYS and MEANS ADVANCES) by 'funded debt' (LONG-DATED or undated GOVERNMENT SECURITIES) is an increase in the interest burden as a result of the longer maturity of government debt. As a result of a forfeiture. called upon allotment. Sometimes. however. even though the quantum has not changed. quality and delivery month for different commodities. There are different formula plans that include the Constant Dollar Plan and the Constant and Variable Ratio Plans. which facilitates OPEN MARKET OPERATIONS and statutory investment by banks. Subsequently. (See INTEREST RATE PARITY THEOREM). Funding The technique of extending the MATURITY of debt by substituting long-term debt instruments for short-term securities through REFINANCING operations. the latter is standardized in terms of quantity. A forward contract is distinct from a futures contract because the terms of the former can be tailored to one's needs whereas. forward contracts are customized contracts that enable the parties to choose delivery dates and trading units to suit their requirements. In other words. Funding operations also result in replenishment of the floating stock of Government Securities. conservative investor who seeks protection from large losses and is not confident of timing his decisions correctly. (See also COMMODITY FUTURES.default in paying money. he remains liable for the sum due. These methods are for the patient. (See DOLLAR COST AVERAGING). HIRE-PURCHASE and FACTORING. Fund-based This term is used to describe financial assistance that involves disbursement of funds. which is known as the 'Forward Rate'. equipment leasing. to the company. it has been extended to 364-day and 91-day auctioned bills. the investor ceases to be a shareholder insofar as the forfeited shares are concerned.) Forward Discount The differential by which a currency is less expensive in the forward market as compared to the SPOT MARKET. funding has been applied to Ad hoc TREASURY BILLS held by the Reserve Bank of India. this is also referred to as 'debt roll-over' or 'conversion'.

Besides holding the shares. Further. The advantage of an issuing company is the inflow of foreign currency funds.94 has five underlying shares. a GDR holder. e. in whose name the shares are registered. as stated above.E. It is an instrument denominated in foreign currency that enables foreign investors to trade in securities of alien companies not listed at their exchanges. e. rest with the local custodian bank. GDRs are generally issued at a modest DISCOUNT to the prevailing market price. the increase in equity is clearly known unlike with FOREIGN CURRENCY CONVERTIBLE BONDS.S. Also. and converted into foreign currency will be remitted to the foreign investor subsequently. be overcome if the Government's coffers get filled due to a growing economy.) Futures Market A market in which contracts for future delivery of certain commodities or securities are traded.This practice of debt roll-over may be employed during tight LIQUIDITY conditions in the financial markets or alter-natively with the objective of matching outflows to receipts.1200 to 1500 crore. in matters regarding dividends.g. However. The proceeds. The shares. it becomes easier for the company to interact with the single ODB that accounts for a large shareholding.g. such a change in the MATURITY profile of debt that causes the interest obligations to become more onerous..) GDR An acronym for Global Depository Receipt. the GDR of G. There are no stipulated norms regarding turnover and MARKET CAPITALIZATION. adjusted for taxes. prospective issuers are expected to have a minimum turnover of Rs. Administratively too. The GDR which is issued by the ODB may trade freely in the security markets overseas. a dollar-denominated GDR issued on behalf of an Indian company represents a certain number of rupee-denominated equity shares. etc. the ODB also performs the functions of distribution of dividends and issue of GDR certificates to replace those lost. however. therefore. may aggravate the repayment situation. DIVIDEND payments are in rupees and. $ 15. (See also FUNGIBLE. As an example. not wanting a continue holding the instrument.. (See also COMMODITY FUTURES and FINANCIAL FUTURES. The latter contingency can. Moreover. may opt for cancellation of the same after the specified period by approaching the ODB and having the underlying shares released by the custodian in India for sale.) . Shipping issued in February 1994 at a price of U. The management may enter into a suitable understanding with the ODB as regards the exercise of voting rights. So. which are issued by the company to an intermediary termed the 'Overseas Depository Bank' (ODB). etc. A bigger discount may trigger off widespread ARBITRAGE trading. company meetings. mutilated. (See also STATUTORY LIQUIDITY RATIO.500 crore and market capitalization in the range of Rs. however. However. there is no exchange risk. DGRs of Indian companies are listed on the Luxembourg Stock Exchange and some on the London Stock Exchange.

generally. I is 'Gross private Domestic Investment' representing the acquisition of new capital goods (e. houses. an individual may transfer his ill-gotten cash to a discreet bank in a foreign country. however. a SHORT SALE could be employed to lock in a price gain on a LONG TRANSACTION. bypassing official and legal channels. (X-M) represents the difference between exports (S) and imports (M) of goods and services. It is the total value of final goods and services produced in an economy in a year. Using the havala route. As an example. national output is the total value added by all producing enterprises. The objective.. A disadvantage with hedging. Gross Domestic Product (DGP) This is a comprehensive measure of the economic activity that takes place in a country during a certain period. Hire-Purchase Arrangement A transaction by which an ASSET is acquired on payment of regular installments comprising the PRINCIPAL and interest spread over a specified period. as well as construction of factories. Goodwill The value of intangible facets of a business such as its name. . Hedging The action of combining two or more transactions so as to achieve a risk-reducing position. plant and machinery) and inventory additions by business enterprises. At a later date. reputation and location. More specifically.Gilt-edged Securities A term often used to refer to GOVERNMENT SECURITIES signifying that the securities have the highest degree of reliability. which is the expenditure by consumers on consumption goods and services.g. there is a loss to the nation in terms of the net inflow of foreign exchange. which is reflected in the excess of its acquisition price over the fair value of its tangible assets. Hence. who then arranges a reciprocal deposit of an equivalent amount to his account in the chosen bank. is that it results in less than the maximum profit that could have accrued. etc. is to protect a profit or minimize a loss that may result on a transaction. he gives the rupees to an intermediary in India. vulnerable to INTEREST RATE RISK and INFLATION RISK. G denotes government expenditure on goods and services. hedging is useful with futures contracts too. the funds could be brought into India through another havala transaction. Since such deals circumvent official channels. For instance. Havala Transaction An Indian term which refers to a mode of transfering of funds out of India or into the country. however. As demonstrated in Appendix II. The computation is on the basis of value added – the contribution of a producing enterprise is the difference between the value of its finished product and the cost of materials used. gross domestic product is expressed as C + I + G + (X – M) Where C stands for consumption. They are.

In its drive towards becoming a global financial supermarket. by assigning letter ratings. Besides granting term loans. which has subsequently been rechristened as ICRA Limited. is to assist investors in assessing the credit risk of various securities such as BONDS and COMMERCIAL PAPER. It has also subscribed to securities of FINANCIAL INSTITUTIONS. In 1995. an unstable source of funds. providing LEASE finance. wholly owned by the Government of India. Hot Money This refers to large amount of short-term funds held internationally by banks. financial advisory services and MUTUAL FUNDS. which can later be sold. DISCOUNTING and REDISCOUNTING of bills. Besides these activities. From 1976. notably the World Bank. REFINANCING loans granted by State Financial Corporations and banks. usually.) IDBI An acronym for the Industrial Development Bank of India. which is a private sector term lending institution set up in 1955. therefore. ICICI An acronym for Industrial Credit and Investment Corporation of India Limited. which is the apex term lending institution in the field of industrial finance. Hypothecation This refers to the pledging of assets as security for funds borrowed. IDBI also performs the important task of coordinating the functions and operations of . the bank may seek recovery of the loan by instituting a lawsuit to seize the hypothecated assets. ICRA An acronym for the credit rating institution. Hundi An Indian term for a negotiable instrument that is similar to a BILL OF EXCHANGE. in anticipation of exchange rate movements or interest rate changes. the CURRENT ASSETS remain with the borrower. the hirer can avail of DEPRECIATION and deduction of interest cost for computing taxable income. managing PUBLIC ISSUES and providing VENTURE CAPITAL. The agency has been promoted by various financial institutions including Industrial Finance Corporation of India. but in case of default. It is active in providing finance through term loans. Hot Money is. Technology Development and Information Company of India (TDICI) for the promotion of indigenous technology and SCICI for financing the shipping industry. Bank lending for working capital involves a hypothecation of INVENTORIES and book debts. (See EQUITY GRADING. Investment Information and Credit Rating Agency of India Limited. it assists businesses by DISCOUNTING bills. Its sponsors include foreign institutions. The role of this agency like Credit Rating and Information Services of India Limited (CRISIL). The corporation has also been instrumental in setting up other important institutions such as Credit Rating and Information Services of India Limited (CRISIL) for credit rating. ICICI's new thrust areas are banking. IDBI has been functioning as a separate entity. particularly foreign currency loans.Although the asset gets transferred on payment of the last installment. State Bank of India and Unit Trust of India. institutions and wealthy individuals which quickly move out of or into a country. IDBI issued equity shares through public subscription. Under this arrangement.

S. its area of focus is financing major infrastructure projects such as highways. IL&FS An abbreviation for the finance company. Over the years.) In-the-Money An expression used to indicate that an OPTION has an immediate tangible value because of the difference between the current market price of the share and its exercise price. the interest LIABILITY may be made cumulative.other term lending institutions in the country. This type of security is generally associated with rehabilitation schemes under which no immediate burden is placed upon companies as they gradually return to good financial health. (See also OPTION). the fund saves substantially on research and administrative expenses. The Index Equity Fund launched by the Unit Trust of India in May 1997 is based on stocks figuring in the SENSITIVE INDEX and the NSE-50 of the NATIONAL STOCK EXCHANGE. if a company's share is trading at Rs.110 while its call has an exercise price of Rs. IFCI is also responsible for establishing among others. After a few years. IDBI has played a key role in setting up Small Industries Development Bank of India (SIDBI) and more recently. the Management Development Institute in Gurgaon. Setting up the portfolio is called 'Indexing'. IL&FS is also active in leasing. The investments of such a fund are in the same stocks as those comprising the selected market index and in the same proportion as their weights in the index. Its promoters include Central Bank of India and Unit Trust of India. asset credit and merchant banking. Industrial Finance Corporation of India was set up by the Government of India in 1948 to provide medium and long-term finance to businesses in the private sector. . This innovation in the U. Like other financial institutions venturing into newer areas. Since the portfolio of an index fund replicates a certain index. bridges and power plants. Income Bond A hybrid debt security which promises interest only if a certain level of net income is earned. sprung up as a result of research findings that the Standard & Poor's 500-stock index (a proxy for a market portfolio) had outperformed many INSTITUTIONAL INVESTORS during 1960s and 1970s. the option is said to be in the money. the National Stock Exchange and Credit Analysis and Research (CARE). IDBI has turned to leasing. and Technical Consultancy Organizations in different states. it floated a PUBLIC ISSUE of equity shares after its conversion into a company. advisory services for infrastructure projects and stock broking. IFCI was forbidden from raising funds through debt or equity.100. As the name suggests. the Tourism Finance Corporation of India Limited. Index Fund This is a MUTUAL FUND whose PORTFOLIO mirrors a market index. (See also TOLL BOND. In late 1993. IFCI The oldest of the term lending institutions. IFCI has diversified its activities to leasing and merchant banking. For example. Earlier. Infrastructure Leasing and Financial Services Limited.

0167. and it could be as short as one or a few days.968. The period usually does not exceed six months. Junk Bonds The debt securities of companies bearing a considerable degree of risk that is reflected in their mediocre or poor CREDIT RATINGS. such as.S. over a period of 30 days. this is known as 'demand-pull inflation'. the interest accruing will be 1 x (18/100) x (30/300) = $0. For example. Thus. generally. high-grade DEBENTURES and shares. Alternatively referred to as 'Low-grade' or 'High-risk' BONDS. It may also result from an increase in the cost of some critical input. Moreover.015 = DM1. Intercorporate Deposit A short-term deposit made by one company with another. which then triggers off a gradual rise in prices in general. These deposits are essentially "brokered Deposits" given the extensive involvement of brokers. the forward rate should be $1 – 2. the market for these securities is thought to be inefficient. $1. significantly higher than the banks' lending rate of WORKING CAPITAL.0167/1. Perhaps. that is not publicly available and is of such a nature that it enables him or her to make substantial profits in share transactions. The interest rate is influenced by market forces and is.Inflation The phenomenon of rising prices of goods and services in general. those of (a) relatively new companies of below INVESTMENT GRADE quality. It can come about due to a scarcity of supplies in relation to demand. assume that the spot rate between the U. Investment Account The PORTFOLIO of long-term securities held by a bank that usually consists of GOVERNMENT SECURITIES. dollar and the Deutsche Mark is $1 – DM2 and that the prevailing annual rates of interest on the dollar and the mark are 18 and 10 percent respectively. Since INSTITUTIONAL INVESTORS would steer clear of Junk Bonds. the perceived risk is greater than the actual risk. Insider A term used for one who has access to information concerning a company. Interest Rate Parity Theorem A theorem that explains how the forward and spot currency exchange rates between two countries are related through their respective nominal interest rates. Thirty days hence.0167.015 and 2 x (10/100) x (30/360) = DM0. Therefore. such as steel or petroleum. Junk Bonds include a wide spectrum of fixed-income securities. thereby offering opportunities for a higher return compared to higher-grade bonds.015 is equivalent to DM2. this is known as 'cost-push inflation'. but likely to be upgraded and (b) companies whose ratings have fallen owing to financial woes. low-grade bonds are less sensitive to interest rate changes. .

Bank of Baroda and its report submitted in 1997. includes the following recommendations :      The MPBF prescription is not to be enforced and banks may use their discretion to determine the credit limits of corporates. term finance and WORKING CAPITAL. Some of the recommendations of the committee are :  A gradual move towards UNIVERSAL BANKING with an appropriate enabling regulatory framework for that purpose. To suggest measures for achieving harmonization in the activities of DFIS and banks. The developments that prompted the decision to appoint the Committee were the gradual entry by DFIs and banks into each other's territory. and to suggest alternative methods. The financing bank may use its discretion to determine the level of stocks and receivables as security for working capital assistance. Chairman.S. . structure and operations of DFIS and commercial banks in the emerging environment and to suggest changes. Khan Committee A working group that was appointed by the Reserve Bank of India (RBI) in December 1997 to harmonize the role and operations of development finance institutions (DFIs) and banks. the terms of reference of the committee included the following :   To review the role. Headed by S. Kannan. Khan. banks have been given the freedom to assess working capital requirement within prudential guidelines and exposure norms. Kannan Committee A committee constituted by the Indian Banks' Association to examine the relevance of the concept of Maximum Permissible Bank Finance (MPBF) as a method of assessing the requirements of bank credit for WORKING CAPITAL.H. and the absence of reserve requirements of DFIs. The CREDIT MONITORING ARRANGEMENT and QIS may cease to be regulatory requirements. The mechanism for verifying the end-use of bank credit should be strengthened. have found it worthwhile to specialize in Junk Bond investing.. an advantage vis-à-vis banks. some MUTUAL FUNDS in the U. Banks may evolve their methods to assess the working capital needs of borrowers – the Turnover Method or the Cash Budget Method or the MPBF System with necessary modifications or any other system. viz. The committee was headed by K. Since April 1997. Incidentally. then Chairman of the Industrial Development Bank of India.An interesting strategy is to buy Junk Bonds in anticipation of an improvement in rating which would result in price appreciation. A credit Information Bureau may be floated independently by banks. the dwindling supply of funds to DFIs owing to a reduction in the STATUTORY LIQUIDITY RATIO.

Several observations and recommendations were made in its report in 1989. The rentals may be so structured as to enable the lessor to recoup the investment with a return in the early part of the . Khusro Committee A Committee headed by an economist. Borrowing capacity is not affected since it is an OFF-BALANCE SHEET form of financing. depending on the payments schedule. Possibility of a faster tax write-off. including the following :    Setting up of an apex institution for the co-operative banks. which may jeopardize the continued use of leased assets by the lessee. Merger of Regional Rural Banks (RRBs) with the respective sponsoring banks. Tax deduction on lease payments. Less time consuming and excludes costs such as compensating balances and INDENTURE CONVENANTS. here. Speedy implementation of legal reforms to hasten debt recovery. Leasing is an alternative source of funds with certain advantages as listed below :      Availability of 100 percent financing. Reducing CASH RESERVE RATIO to international standards and phasing out the STATUTORY LIQUIDITY RATIO. that conducted an appraisal of the agricultural credit system in India.M. in order to increase the tempo of agricultural lending. Establishment of Agricultural and Rural Development Corporations for some eastern and north-eastern states of India. and among banks and financial institutions. there is the risk of financial failure of the lessor. There are different types of leasing arrangements such as the following : Financial Lease A lease with no cancellation clause and no provision for maintenance. A.   Exploring the possibility of gainful mergers between banks. the lease covers the useful life of an ASSET and its cost is fully AMORTIZED. Khusro. in return for rent payable at regular intervals. Lease A contractual arrangement by which a firm or person acquires the right to use an ASSET for a definite period. Flexible terms of payment. The disadvantages associated with leasing are that it can be an expensive source of funds and also.

Listing The grant of approval for dealings in a certain security (e.. LIBOR An abbreviation for London Inter Bank Offer Rate. unlike in a . Although the borrowing company signs a common document (containing clauses relating to term. In syndication. companies must pay their respective exchanges. repayment and security). Letter of Credit A financial instrument issued by a bank on behalf of a purchaser of goods. for which a detailed write-up (Information Memorandum) may be circulated. it has a distinct contractual relationship with each of the syndicate members. In other words. Loan syndication The participation by a group of lending institutions as financiers to a single borrower. which is an average of the interest rates at which leading international banks are prepared to offer term EURODOLLAR DEPOSITS to each other. interest. (See also LISTING AGREEMENT). share or DEBENTURE) at a stock exchange. By an ordinance promulgated in January 1995. Limited Liability A term which conveys that the responsibility of shareholders. Libor is also used as a reference rate in quoting interest rates on various other loans.term. the interest charged by member banks may differ. Thus. each shareholder is liable to pay the full nominal value of shares held by him or her. Consequently. issue of new certificates in lieu of torn or defaced ones and timely intimation to the exchange authorities regarding the board of directors� meetings on important matters. is limited to the extent of the amount remaining unpaid towards their shares in the company. for goods delivered. undertaking responsibility to pay a certain amount during a specified period. the Government empowered SEBI to impose punishment for violation of the listing agreement. only a nominal rent is payable during the �Secondary Lease Period�. Listing Agreement A detailed undertaking to be submitted to a stock exchange by a company whose security is to be admitted for trading on the exchange. time-bound registration of shares. The provisions contained in a prescribed format relate to. The interest rate differs according to the deposit MATURITY and the soundness of borrowing banks. after reviewing BIDS from different banks. drawn up by the syndicate manager. known as the �Primary Lease Period�. an annual listing fee which is linked to the PAID-UP CAPITAL. The syndicating bank then invites the participation of other banks. The borrower may select a bank to arrange for syndication. among other things.g. so that no institution individually has a high exposure. for debts and other LIABILITIES of their company. which comprises the remainder of the asset�s life.

the INSURANCE REFORMS COMMITTEE has made several suggestions in its report submitted in January 1994. Malegam Committee A committee set up by the Securities and Exchange Board of India (SEBI) to suggest reforms in the primary market. which may be fixed or floating. The advantage of this cash management system is that it eliminates the clerical functions prior to the deposit of the cheques. The interest rate. It is the sum of M1 and the net TIME DEPOSITS (together with the portion of savings deposits no included in M1) with banks.) Lock-box A facility used in the U. 'Net demand deposits' comprise current account deposits and a portion of the savings deposits considered as a demand LIABILTY.H. The company is thereby able to reduce FLOAT and realize sale proceeds faster M1 A measure of the stock of money in India. Malegam. (See also BEST EFFORTS BASIS and SHETTY COMMITTEE. The committee. . M1 is calculated by adding the net demand deposits of banks and 'Other' deposits with the Reserve Bank of India (RBI) to the sum of currency notes and coins held by the public. R. It is also called 'Broad Money'. mainly depends on the credit standing of a borrower. Several recommendations of the committee have been accepted by SEBI and implemented through its guidelines. and these include:     Stricter norms of disclosure of financial information in the prospectuses of companies raising capital. that includes the following :  To permit the entry of private as well as foreign firms in the insurance business. (See also REDDY COMMITTEE. M3 A measure of the stock of money in the nation with reference to which monetary targets are set by the Reserve Bank of India.S. which is also referred to as "Narrow Money". N. M3 is a function of RESERVE MONEY. Malhotra. Loan syndications can be arranged to finance term requirements or WORKING CAPITAL. (See also CHAKRAVARTY COMMITTEE) M4 The sum of M3 and total post office deposits. 'Other' deposits with RBI refers to funds held by certain institutions like the Industrial Development Bank of India and International Monetary Fund. gave its recommendations in the second half of 1995. Thus. headed by Y. headed by the former Reserve Bank of India Governor.) M2 The sum of M1 and post office savings bank deposits. foreign governments and CENTRAL BANKS. all held by the public.CONSORTIUM arrangement. Permitting companies to undertake BOOK BUILDING. depending on the issue size. A bank collects and arranges for clearance of cheques that are sent by customers to a designated post office box. creditworthy borrowers may find syndication more advantageous. Malhotra Committee A committee set up to recommend reforms in the insurance sector. Draft prospectus filed with SEBI to be treated as a public document. and elsewhere for speeding up collections.

The market portfolio is a theoretical construct and it does not exist in reality. To set up a regulatory authority for the insurance industry. The committee's recommendations have been accepted by the RBI with certain modifications.. Market capitalization may be determined for a company or for the stock market as a whole. (See VARIABLE COST). The one-bank-per-district approach is to be discarded. To restructure the Tariff Advisory Committee. the marginal tax rate rises as income increase. Ltd. The delink GIC and its four subsidiaries namely: o (a) Oriental Fire and Insurance Co. Market capitalization = Number of shares x Market price of each share. Marathe of the Reserve Bank of India (RBI) Board. Market Portfolio A PORTFOLIR whose composition in terms of securities and their proportions is identical to the composition of all the risky securities in the market. In a progressive tax regime. S. initial membership and other parameters within a specified time. Marginal Tax Rate The rate of tax applicable on additional income. o (c) New India Assurance Co. Ltd. Headed by S. expressed as a percentage. Introduction of a monitoring system to generate early warning signals and for the timely detection of sickness. the practice is to use a PROXY for the market. Marathe Committee (on Urban Co-operative Banks) A committee set up to review the licensing policy for new urban co-operative banks. Marginal Cost The cost of production and additional unit of a product. To discard the system of licensing of surveyors by the Controller of Insurance. Ltd. and o (d) United India Insurance Co.     To reduce government stake in Life Insurance Corporation (LIC) and General Insurance Corporation (GIC) to 50 percent and restructure the two. favour a liberal entry policy and include :    Establishment of new urban co-operative banks on the basis of need and potential. Ltd. Therefore. and achievement of revised viability norms. Market Capitalization The value of equity shares outstanding at prevailing market prices. (See PRICE-SALES RATIO). o (b) National Insurance Co. Some stock market players attempt to gauge the price appreciation potential of a stock by relating market capitalization to the company's sales. which is usually a broad-based index. the committee's prescriptions submitted in May 1992. . It is the ratio of the change in total tax to the change in the base on which it is imposed. Achieving prescribed viability norms in terms of share capital.

Vertical. combining plants in different stages of production. the term mutual fund refers to both the OPEN-END and CLOSED-END types of investment companies. the broker would reduce the short seller'' account and increase the account of the lender of securities. MIBOR An acronym for the Mumbai Inter Bank Offer Rate. an individual who owns a share in a mutual fund has a proportionate claim on the PORTFOLIO of investment vehicles held by the fund. in common parlance. Besides refinance assistance. NABARD's share capital will . Conglomerate. For instance. Set up in 1982. This provides protection to the latter and helps in determining the actual margin in the former'' account. REGIONAL RURAL BANKS and others. uniting dissimilar plants and products. The SUBJECT-WISE LISTING mentions the different types of mutual funds that are explained elsewhere in this book. the term mutual fund refers to the 'Open-end' type of investment company which has no limit on the number of shares that it can issue. state cooperative banks. Units 1964 scheme is a prime example. all over India. Thus. for the development of agriculture. a REFINANCE extension institution. handicrafts and other sectors in rural areas. The portfolio manager must estimate the maximum possible demand for REDEMPTION and accordingly retain some liquid ASSETS. a broker is able to quickly determine the LIABILITY resulting or the profit accruing to either side. it is the apex institution for agricultural and rural credit.Marketing-to-Market A process of monitoring and updating the account positions of different parties to a transaction. small-scale industries. NABARD interacts with commercial banks. though primarily. involves some distinct challenges. Merger The combination of two (or more) companies into one entity. However. NABARD An acronym for the National Bank for Agricultural and Rural Development. as for example in a SHORT SALE. if the price of a share sold short were to rise. The Unit Trust of India's. which is the weighted average interest rate of the rates at which certain banks/ institutions in Mumbai belonging to a representative panel are prepared to lend CALL MONEY. According to the proposals of the Union Budget 1996-97. Managing an open-end fund however. Three common forms of mergers are :    Horizontal. daily calculation of the NAV requires a sophisticated information system. By debiting and crediting the different accounts in tandem with security price changes. usually through the exchange of shares. In financial nomenclature. village industries. Accordingly. Mutual Fund An organization that mobilizes the surpluses of savers and invests the same in different securities. NABARD gives loans to banks and state governments which are channeled to the rural sector. Moreover. uniting similar plants and products.

the government has acted upon many of the suggestions. price rigging and a lack of transparency. RBI to be primarily responsible for the regulation of the banking system. The sponsors. All banks to attain CAPITAL ADEQUACY OF 8 percent in a phased manner. Narasimham Committee (1991) A committee appointed by the Government of India in August 1991. (See HEALTH CODE SYSTEM). Doubtful and Loss. Banks and financial institutions to classify their ASSETS into four broad groups. phased over five years in the STATUTORY LIQUIDITY RATIO (SLR) to 25 percent. particularly as a market regulator rather than as a controlling authority. Banks to make substantial provisions for bad and doubtful debts. NABARD's share capital has been progressively enhanced to Rs. The system provides the latest BID and ASKING PRICES quoted for any security by different dealers. to examine all aspects of the financial system. These actions include reductions in CRR and SLR. stipulation of capital adequacy norms for banks and announcement of guidelines for new private banks. satellite link and electronic media that facilitate transactions in securities by investors across India. Instituting an ASSETS RECONSTRUCTION FUND to which the bad and doubtful debts of banks and FINANCIAL INSTITUTIONS could be transferred at a DISCOUNT. Larger role for SEBI.S. The committee was headed by M. Standard. are :            A reduction. organization functions and procedures. This is one of the measures aimed at doubling the flow of credit to agriculture and agro-industries. National Stock Exchange (NSE) It is a nationwide screen-based trading network using computers. subject to RBI norms. the over-the-counter market in the U. Narasimham. Efforts to get the exchange going began with its incorporation in November 1992. Facilitating the establishment of new private banks. as announced in the SLACK SEASON credit policy of 1997-98 by the Reserve Bank of India. Sub-standard. Gradual deregulation of interest rates. This enables an investor to have his or her transaction done at the best price. synchronized with the planned contraction in FISCAL DEFICIT.quadruple to Rs. Some of the recommendations offered by the committee. in its report submitted in November 1991. viz. Profitable and reputed banks be permitted to raise capital from the public. is like a vast but convenient trading floor on which several thousand stocks are traded.S. NASDAQ An acronym for National Association of Security Dealers Automated Quotations System. Due to NASDAQ. The idea of this model exchange (traced to the Pherwani Committee recommendations) was an answer to the deficiencies of the older stock exchanges as reflected in settlement delays. Reserve Bank of India (RBI).2000 crore in the coming five years. . former Governor. As a sequel to the report. in terms of its structure.1500 crore. A progressive reduction in the CASH RESERVE RATIO (CRR). Accordingly. which is a nationwide network of computers and other electronic equipment that connects dealers in the over-the-counter market across the U.

It WDM segment involves transactions in TREASURY BILLS. An expert committee. Other distinct features of the NSE include :    Separation of the ownership (and management) of the exchange from the right to trade on the exchange. OPEN-END FUNDS set their sales and repurchase prices on the basis of their net asset values. interest. the prices of CLOSED-END FUND shares. in order to arrive at the total net assets. UTI Mastershare.. Differences in valuation and accounting policies with respect to quoted and unquoted or unlisted shares. are deducted.mainly FINANCIAL INSTITUTIONS. has suggested specific valuation norms for debt and equity securities. upon request. debentures. from this figure. GIC and LIC with IDBI playing the lead role. it furnishes voluminous market information on-line. it was contemplated that the NSE would function primarily as a wholesale debt market (WDM) and that for EQUITY SHARES. The magnitude of NSE's impact can be gauged from the fact that in February 1996. Reporting of NAV on a weekly basis. CONVERTIBLES. set up by SEBI to examine this matter. A fully automated screen-based trading system that will connect members across the length and breadth of India. are . COMMERCIAL PAPER. GOVERNMENT SECURITIES. albeit temporarily. investments are periodically valued at market prices (although DEBENTURES may be valued at cost or at prevailing yields) and added to other assets. that include the following :   Fees payable to an ASSET MANAGEMENT COMPANY to comprise a 'Basic Annual Fee' and a performance-linked component. PSU BONDS. include IDBI. make a comparison of net asset values of different funds difficult. expressed on a per share basis. expenses. daily turnover in equity shares on the exchange had crossed Rs. it would play a complementary role to the Bombay Stock Exchange (BSE). the committee has made some other suggestions. BSE members seek to extend their new on-line system (BOLT) to other towns and cities. Thus NAV per share is : Total Net Assets ----------------------------------Total number of shares outstanding To calculate the 'Total Net Assets'. Additionally. In the earlier stages. LIABILITIES including fund expenses. However. Net Asset Value (NAV) The net value of a MUTUAL FUND'S PORTFOLIO. NSE's active operations in stocks have unleashed competitive pressures on the BSE and the latter has consequently streamlined its outmoded trading system.1000 crore. In its report released in January 1996. as for instance. CERTIFICATE OF DEPOSIT and DEBENTURES. DIVIDEND. Membership of the exchange is based on professional merit and financial soundness. However. A vexatious matter that the Securities and Exchange Board of India (SEBI) has been wrestling with is the need for uniformity in calculation of the NAV. etc. The system is 'order driven' and provides flexibility to users as to the kinds of orders that may be placed.

Khanna. . the eligibility norm for registration has been made more stringent. There have been other developments of import concerning NBFCs. They include equipment leasing. It serves to determine whether the PRESENT VALUE of estimated future cash flows exceeds the investment on a project. The activities of NBFCs are both complementary and competitive to banks. also offered are fee-based services such as security issues management and advice on MERGERS and ACQUISITIONS. in view of the new areas of financial services that NBFCs have charted. Incidentally. 1977 and amendments thereto. i. a member of the Advisory Council to the BOARD FOR FINANCIAL SUPERVISION. An expert group was constituted by the Reserve Bank of India (RBI). Net Present Value (NPV) A DISCOUNTED cash flow measure to evaluated the viability of an investment proposal. Net Worth The funds belonging to the shareholders of a company. as per RBI's new regulatory framework introduced in January 1998. housing finance and investments in financial securities. to develop an appropriate supervisory framework for those NBFCs that purvey credit. Many of these intermediaries offer other FUND-BASED products too. These activities are specified in the Non-Banking Financial Companies (Reserve Bank) Directions. capital restructuring etc. Non-Banking Financial Company (NBFC) A financial intermediary that is engaged in certain financing activities other than banking. besides the NAV. Among other recommendations.e. the focus of regulatory and supervisory attention is on those NBFCs that accept public deposits. Further. the SHAH COMMITTEE has suggested redefining NBFCs by amending the relevant law. However. it has prescribed a system of off-site surveillance. k is the DISCOUNT RATE and 1 is the outlay.determined by the forces of supply and demand operating in securities transactions. the term 'Net Worth' is synonymous with the funds belonging to the equity shareholders.R. HIRE-PURCHASE. for new NBFCs incorporated in April 1999 or later. a supervisory rating system as well as legislation that would enable the RBI to effectively regulate NBFCs and deal with their financial health and viability. Further. as for instance bill DISCOUNTING and FACTORING. a wider meaning of the term is as follows : Net Worth = SHAREHOLDERS' EQUITY + PREFERENCE SHARE CAPITAL Shareholder's equity is the sum of PAID-UP equity CAPITAL and reserves. It is headed by P. Where CFt represents cash flow in year t. however. insurance companies and stock broking enterprises and excluded. The net present value is the difference of the sum of discounted cash flows and the outlay. Ordinarily.

Odd-lot A lot of shares that is different from a round (marketable) lot. These conventional trading units are called 'Round Lots'. it is one on which interest or any amount to be received has remained 'past due' for a period of two quarters as on March 31. Through OMO. DISCOUNT AND FINANCE HOUSE OF INDIA and SECURITIES TRADING CORPORATION OF INDIA. the banking system. as per Reserve Bank of India's directive. it acts as a conduit for investment activities of international INSTITUTIONAL INVESTORS and other intermediaries. by the CENTRAL BANK of a country to expand or contract the reserves with the banking system. An amount under a credit facility is past due when it has not been paid within 30 days from the due date. besides the CASH RESERVE RATIO and STATUTORY LIQUIDITY RATIO. it can also be misused for money laundering and other undesirable activities.. the number of shares outstanding keeps changing because of the continuous influx and exit of investors. A stock exchanges. (See also MUTUAL FUND). The appointment of 'PRIMARY DEALERS' to intensify the participation of intermediaries. These actions. or inject the same into. Any lot that is different from the prescribed trading unit is deemed an odd-lot. . For CASH CREDIT and OVERDRAFT facilities. transactions are done in lots mostly of 100 or 50 shares and multiples thereof. Thus. Due to the constant changes in the aggregate portfolio value and the number of shares. 1995. At some stock exchanges.Non-performing Asset (NPA) A credit facility which ceases to generate income for a bank. the Reserve Bank of India (RBI) is able to absorb liquidity from. Income from NPAs cannot be taken to the profit and loss accounts of banks. Hence. odd-lot trading takes place on Saturdays. The purchase and sale prices for redeeming or selling shares are set at or around the net asset value. The promotion of new institutions viz. Simultaneously. Since it is envisaged that OMO will become the dominant tool of monetary control in India. Open-Market Operations (OMO) The purchase or sale of securities. and in fact. there are some specified criteria for identifying NPAs. are as follows :      A shift to market rates of interest on Government Securities. the NET ASSET VALUE keeps changing. there is no limit on the number of shares that can be issued. While an OFC can boost the flow of investments and give a fillip to related industries such as tourism. Open-end Fund A mutual fund which continuously issues new shares or units to meet investors' demand. The introduction of the Delivery versus Payment' system. Offshore Financial Centre (OFC) A place that encourages financial activities by having a pragmatic regulatory environment with few exchange controls. it redeems shares for thse who want to sell. Open Market Opertions serve as an instrument of PUBLIC DEBT management and also of monetary control. which will enhance the effectiveness of OMO. Generally. the government and RBI have initiated a series of measures to deepen and widen the market for GOVERNMENT SECURITIES.

The maximum possible loss is the price paid for the option. by executing offsetting transactions. which extends up to what is known as the 'Expiration Date'. American options may be exercised during a certain time period. whether the option is exercised or not. Buying a put is an alternative to a short sales of the underlying shares. The buyer is under no obligation to exercise his right and may simply let the option expire.S. The value of an option comprises a time value and an INTRINSIC VALUE.  Promotion of the MARKING-TO-MARKET basis for the valuation of APPROVED SECURITIES held by banks. by selling a call or a put. in order to promote the retail market segment. The value of a call option rises with the price of the underlying share whereas. investment decision. if the operating income of a company rises to Rs.2.000 to 1. in order to increase volume. Importantly though. Operating Leverage The ability to magnify profits from increases in sales due to a firm's operating costs being largely fixed than variable. are in denominations of 100 shares. its degree of operating leverage suggests that it will benefit by increasing volume : Therefore. Opportunity Cost The value or benefit from an alternative proposal. Option A contract that gives the holder the right to buy ('Call Option') or sell ('Put Option') a certain number of shares of a company at a specified price known as the 'Striking Price' or 'Exercise Price'. Exchange-traded options in the U. is measured by the ratio : Percentage change in OPERATING INCOME ------------------------------------------Percentage change in units sold or in sales To illustrate. at which revenues equal total costs. the time value converges to zero. the company could adopt a competitive pricing strategy.g.20. that is foregone in favour of another. As the expiration date approaches. known as the 'Premium'. the latter resulting from the price of the underlying stock. When the proportion of VRIABLE COSTS is small.1. Buying a call option is an alternate to buying the underlying shares.40.. the writer obligates himself to deliver or buy shares if the option is exercised. The attraction of buying options is a potentially large profit on a relatively small investment. the buyer or the writer may independently terminate their outstanding positions before the expiration date. the value of a put option increases as the price of . a call buyer's outlook is essentially bullish whereas a put buyer is bearish about the underlying share.000 as a result of an increase in the number of units sold from 90. Permitting banks to trade in Government Securities. The premium is paid by the option buyer to the option writer (seller) who keeps the money. any increase in sales results in a significant impact on profitability beyond the BREAKEVEN POINT.000. The degree of operating leverage which guages the impact on profitability of a change in volume. However.60. e. Thus.000 from Rs.

6 per share. At a striking price of Rs. Joy buys a six-month call on Yummy Ice Cream Ltd. this call is said to be 'out-or-the-money'. OTCEI's operations began in 1992 and its network consists of counters located all over the country.28. .4. Peppy buys a six-month put at a striking price of Rs.50. They help in originating issues. This is illustrated in the examples (Appendix II contains an illustration of HEADING involving options) given below Mr. They may deal in securities or act as brokers. This modern market characterized by fully computerized operations. Incidentally. paying a premium of Rs.50 per share. Members of the OTC Exchange include FINANCIAL INSTITUTIONS. which means that the put is 'in-the-money'. The share is currently trading at Rs. To fall.. How well does Mr. The dealers are intermediaries between buyers and sellers. Mr.30. the prohibitive cost of a PUBLIC ISSUE through the conventional route also spurred the development of this alternative forum.the share falls. i.60. The share is currently trading at Rs. paying a premium of Rs. in order to overcome problems such as the lack of transparency and delays in settlements that have plagued the older exchanges. Companies with a small equity capital and certain permitted securities are traded on it. was promoted by the Unit Trust of India. Each counter is the location of a member or dealer and serves as a trading floor. the latter function entails offering two-way quotes for a stipulated period from the date of LISTING. Rupees Share Price at expiration date 15 20 Put Value(on 100 shares) Premium(on 100 shares) Net Profit/Loss 25 28 30 35 nil 40 nil 1500 1000 500 200 nil 1050 550 50 -450 -450 -450 -450 -450 -450 -450 -250 -450 -450 -450 OTC Exchange of India (OTCEI) A floorless national securities exchange with a screen-based system of trading. sponsoring companies and also in ensuring LIQUIDITY by making a market. is shown below (brokerage and taxes excluded): Rupees Share Price at expiration date 45 Call Value(on 100 shares) Premium (on 100 shares) 0 55 0 65 66 75 85 500 600 1500 2500 -600 -600 -600 -600 -600 -600 Net Profit/Loss -600 -600 -100 0 900 1900 Expecting the share of Lite Umbrella Ltd. since the market price is below the striking price. Among others. subsidiaries of banks and certain MERCHANT BANKERS. and SBI Capital Markets Ltd. ICICI. linked by computers and other electronic media. Peppy perform? This performance depends on the share price movement during the life of the option. Additionally. The profit or loss picture at different market prices six months hence.e.

Thus the share certificates remain in the custody of the registrar. induced exporters to postpone repatriation of export earnings. facilitates quick transfers at the registrar's end.The Initial Counter Receipt (ICR) is the document an investor gets upon allotment in an OTCEI issue. certain DEBENTURES. The COUNTER RECEIPT is the document in OTCEI transactions that evidences the purchase of a share. if a company whose EARNINGS PER SHARE are Rs.10 pays a dividend of Rs. including payment and delivery of securities. Payment is made to an investor against the SCS.2 per share. An investor is able to see the price quotes on the OTC scan when placing a buy/ sell order. Payback Period The time taken to recover the investment on a project. which is paid out as DIVIDENDS.30 lakh to Rs. especially when the rupee was expected to depreciate vvis-à-vis the US dollar. In this function. In addition. any company with a PAID-UP CAPITAL from Rs. the payout ratio is 20 percent. it is necessary to appoint a sponsor from among the OTCEI members. The 'Sales Confirmation Slip' (SCS) confirms the sale of the shares. In February 1996. permitted securities and MUTUAL FUND shares are also traded on the OTCIE. advance against foreign bills presented for collection. being concessional. Payout Ratio The proportion of earnings available to common stockholders. banks assist exporters through non fund-based facilities such as issuance of letters of guarantee and LETTERS OF CREDIT. Subject to certain conditions.25 crore could be listed on the OTCEI. Besides listed securities. Post-shipment finance can be in the form of purchase or DISCOUNTING of export bills. This is ascertained in the following manner : . etc. This decision was based on the assessment that the credit provided under the scheme. A major advantage of the system is the transparency and speed with which transactions are completed. the Reserve Bank of India scrapped the PSCFC scheme. advance against cash incentives. a company ma fix its payout ratio at 40 per cent of earnings. Post-shipment Credit Funds lent by banks in rupees or dollar-denominated credit (PSCFC) to exporters after the shipment of goods. The payout ratio can be the basis for setting the long-term dividend policy. For instance. Hence. This is useful to exporters who may otherwise suffer a long collection period. The existence of an electronic depository eliminates and cumbersome method of physical movement of securities and so. The post-shipment rupee credit continues to be available. Post-shipment and PRESHIPMENT finance entail disbursement fo credit and hence are FUND-BASED. The shares may be originated by a direct public issue or through a BOUGHT-OUT DEAL.

More recently. banks have been given the freedom to have different PLRs for different maturities. In contrast. the conventional method of PUBLIC ISSUE invites subscription from . the Reserve Bank of India has decided to permit banks to announce separate Prime Term Lending Rates on term loans of three years and beyond. This method has some obvious drawbacks. From October 1997. it does not consider the time value of money nor the cash flows beyond the payback period. and size of the SECONDARY RESERVE. major banks and also FINANCIAL INSTITUTIONS in India periodically announce their PLRs depending on their cost of funds and competitive lending rates. prior to the shipment of goods. The prime rate serves as a benchmark for deciding on the interest rate to be charged to other borrowers. the transactions for fresh offerings fo EUQUITY SHARES. Pre-shipment finance can be in the form of packing credit. by a company. or to a limited number of individual investors. Primary Market The segment of FINANCIAL MARKETS in which securities are originated. legally required to be held by a bank and (b) working reserves maintained to facilitate operations such as payments to depositors and credit disbursement. Price-earnings Ratio The market price of a share divided by EARNINGS PER SHARE. Prime Lending Rate (PLR) The rate of interest charged by banks on WORKING CAPITAL and short term loans to their most credit-worthy borrowers. DEBENTURES.In the above example. assuming that the cash flow during the first half of the third year will be Rs. Accordingly. business conditions. PREFERNENCE SHARES.50. The multiplicand can be the expected earnings per share. the payback period is estimated at two years and six months. is often used by investors and analysts to determine the upward potential of a share by comparing its multiplier to that of the particular industry as a whole. also known as the 'Multiple'. advance against cash incentives and others. (See FINANCIAL MARKETS.00. The level of working reserves depends on several factors that include the scale of operations. One simple rule of thumb suggests that the P/E ratio can be as high as the anticipated growth rate of a company. of its securities to one or a few FINANCIAL INSTITUTIONS through a process of direct negotiations. profile of depositors. Such credit may be in the form of a loan. and other securities are collectively referred to as the primary market. CASH CREDIT or OVERDRAFT facility. Packing credit is offered to an exporter for purposes of packing and shipment and also manufacture of goods. Private Placement The sale. Thus. or 'Multiplier'.) Primary Reserve The sum of (a) cash reserves. This number. Pre-shipment Credit Funds lent by banks in rupees or foreign currency (PCFC) to exporters.

widely distributed by a public company that seeks to mobilize funds from the public at large. i. international FINANCIAL INSTITUTIONS. loans from foreign countries.e. public debt includes the debt of Central. Dates of opening and closing of the issue. i. A recent trend has been the placement of EQUITY SHARES with foreign financial institutions for sourcing foreign exchange.investors in general..e. 1956 and rules laid down by SEBI.) Proxy A document that facilitates the transfer of a share-holders right to vote in favour of another person who may represent and vote on his/her behalf at a general meeting of the company. Names of the underwriters and brokers to the issue. TREASURY BILLS. (See also MALEGAM COMMITTEE. special bearer BONDS and special loans and securities outstanding. An investment proposal is viable if the index is greater than unity. prospects. The term proxy also refers to the person authorized to act on behalf of another. Names and addresses of the directors of the company. Excerpts from the company's Memorandum and Articles of Association such as its main objects rules regarding FORFEITURE of shares and so on. A very large portion of the internal debt obligations is held by the Reserve Bank of India. The format and contents of the prospectus must conform to the relevant provisions of the Companies Act.. Profitability Index (PI) A DISCOUNTED cash flow method used in capital budgeting to evaluate the financial viability of investment proposals. In a broader sense. Public Debt The debt obligations of the Government of India comprising external debt. The advantage of a private placement is the substantial saving in marketing expenses that a public issue entails. A prospectus contains several details about the company including the following :        Particulars about the issue-number of shares or other securities for which subscription is invited. State and Local governments and . The index (PI) is calculated by the formula : Where the numerator is the sum of the discounted cash inflows (present value) over the life of the project and the denominator is the initial outlay on the project. Prospectus A document required to be filed with the Registrar of Companies and also. Auditors' report. the information about the project. The purpose for which funds are being raised. risk factors and other relevant information. etc. and internal debt that includes market loans.

Its terms of reference sought. of a company. Canvassing for the issue is done mainly by the brokers who approach prospective investors directly or via sub-brokers and supply application forms and informative brochures. Through reinsurance. i.g. This assertion. turnover. Thus. which includes the following recommendations :    The introduction of a new set of monetary and liquidity aggregates as detailed below. Reddy Committee A working group on matters relating to money supply which was appointed in December 1997 under the Chairmanship of Y. etc. IDBI and NABARD provide refinance to a host of banks and institutions vis-à-vis the loans made by the latter to ultimate borrowers.) Public Issue An invitation to the public at large to subscribe to shares or other securities of a company.) Random Walk Theory A proposition that describes the movement of share prices as being random. Refinance may also be increased by the Reserve Bank of India as a short-term measure to douse a sudden flare-up in MONEY MARKET rates. on the strength of its loans or financial ASSETS.V. A public issue entails numerous tasks such as organizing the syndicate of UNDERWRITERS. which would reflect the changing scope of their activities..) Ratio Analysis The use of financial ratios for assessing the financial ratios for assessing the financial performance and financial position of a company by means of various ratios that relate to the LIQUIDITY.also Government-owned entities. especially CHARTING which rests on the idea of trends in share prices. an insurance company spreads the risk of excessive loss on big . Reinsurance An arrangement under which an insurer shares the risk of large losses with another insurer. the CALL MONEY rate. an assessment of the adequacy of existing money stock measures and suggestions to improve the existing reporting system. Reddy of the Reserve Bank of India (RBI). notably. Refinance The system of borrowing by a bank or other financial intermediary from an apex institution or the CENTRAL BANK of a country. challenges the very basis of TECHNICAL ANALYSIS. (See also TREASURY BILL and GOVERNMENT SECURITIES. preparation of the PROSPECTUS and fulfillment of several formalities including. A comprehensive commercial bank survey to be carried out. for instance. (See also PROSPECTUS. profitability. brokers and others. (See also EFFICIENT MARKETS HYPOTHESIS. e. Compilation of a comprehensive financial sector survey in order "to capture the dynamic interlinkages" between depository corporations (banking sector) and FINANCIAL INSTITUTIONS. prior approval from SEBI and the Registrar of Companies.e. devoid of any definite pattern. therefore.. among other things. The committee submitted its report in June 1998.

The reinvestment rate is unvarying and is the same as its YIELD TO MATURITY. Scheduled banks are required to maintain cash reserves with the RBI as prescribed. Registration of stock brokers. registrars to issues. Revaluation The meaning of this term depends on the context in which it appear. 1992. To be included in the schedule. It may be noted that INFLATION in a country has a similar consequence as revaluation. Towards the achievement of these goals. With reference to foreign exchange it denotes an upward revision of a currency's official exchange rate vis-à-vis other currencies or in relation to gold. The arrangement helps to dilute exposure and retain financial flexibility. Promoting investor education. Its conduct must not be to the detriment of its depositors. (See also REAL EFFECTIVE EXCHANGE RATE). coupon from a DEBENTURE or in-flows from a project) are periodically reinvested. Undertaking inspection and audit of stock exchanges and various intermediaries.. sub-brokers. (See also YIELD TO MATURITY) Rekhi Committee A committee on INDIRECT TAXES. transfer agents. containing recommendations for simplification and streamlining of customs and central excise laws and procedures. In finance. the term refers to a fresh valuation of FIXED ASSETS of a company such as land and machinery by an approved valuer. Regulating MUTUAL FUNDS. that submitted its report in 1992. UNDERWIRTERS and others. Revaluation helps to establish realistic values of assets in place of historical costs since market prices and realizable values are taken into consideration by the valuer. they enjoy certain privileges from RBI such as borrowing facilities and remittances at concessional rates SEBI An abbreviation for Securities and Exchange Board of India. 1934. . MERCHANT BANKERS. SEBI is empowered to adopt various measures which include :      Regulating the business at stock exchanges at other markets. a bank must fulfill certain conditions that include : 1. Its role is to protect the interests of investors in securities. In return.5 lakh. the problem of having to reinvest does not arise since there is no periodic cash flow. which is a regulatory body established under the Securities and Exchange Board of India Act. The PAID-UP CAPITAL and reserves must be at least Rs. to promote the development of securities markets and to regulate the same. since exportable goods become more expensive to foreign buyers. 2. However in the case of a ZERO-COUPON BOND.contracts.g. 3. Scheduled Bank A bank that is registered in the Second Schedule to the Reserve Bank of India (RBI) Act. This depends on the investment choice available during the term of a security or project. Reinvestment Rate The rate of interest at which the cash flows from an investment (e.

The lending institution benefits by this arrangement since it frees a large amount of funds for reinvestment. The assistance is usually in the form of a loan at very generous terms. projections. Various assets that generate cash flows can be securitized. by packaging them in the form of securities which are usually termed "PASS-THROUGH SECURITIES". (See also FINANCIAL MARKETS. an analyst may use tools of TECHNICAL ANALYSIS in order to generate short-term forecasts of stock prices.. Moreover. an analyst may specialize in airline stocks while another in pharmaceuticals. KERB DEALS.this is known as 'Cherry Picking'.. The assets are selected from a pool that is carefully sifted. The proceeds from the issue of securities are given to the housing finance company.) Security Market Line A linear relationship between the expected rate of return on a security and its SYSTEMATIC RISK indicated by BETA. a long MORATORIUM period.Secondary Market The segment of FINANCIAL MARKETS in which securities that have already been issued are traded. a security analyst makes recommendations to buy. long before they become due. Examples are repairs and maintenance expenses. is to enable promising entrepreneurs with inadequate capital to set up their enterprises. from a lending institution to investors through an intermediary. Seed Capital The financial assistance towards a promoter's equity contribution. their investment quality can be determined from the CREDIT RATING. The assignment of loans is mostly without recourse to the original lender. say MORTGAGES. Alternatively. The periodic interest and principal are collected by the SPV and passed on after retaining service costs and insurance fees.S. nominal service charge and a lengthy repayment period. alternatively called 'Equity Support'. strengths and weaknesses – that will have a bearing on the intrinsic worth of an ASSET. Sensitive Index A statistical measure of the prices of 30 selected stocks traded on the Bombay .. They tend to specialize in a particular industry or a few industries.g. A trust or an intermediary termed 'Special Purpose Vehicle' (SPV) is involved in the arrangement of securitization. housing loans and car loans. Semi-Variable Costs The costs that vary with output though not proportionately. as e. The technique that is commonly employed to identify mispriced securities. On this basis.) Securitization The transfer of loans (ASSETS) of a homogeneous nature. Thus the secondary market comprises security exchanges and also transactions taking place elsewhere.g. among others. They are subsequently monitored over a period of time to confirm their financial soundness – this part is termed 'Seasoning'. the financial instruments that are created present an attractive investment opportunity. as e.g. involves an examination of the fundamental aspects – economic outlook. Security Analyst An individual who evaluates and identifies stocks and other securities for investment. Analysts in the U. (See also FUNDAMENTAL ANALYSIS and TECHNICAL ANALYSIS. are employed by brokerage firms and e. The SPV holds the loans and issues paper against the security of the loans. sell or hold securities. if available. For instance. industry prospects and a company's plans. Considering that there is such a careful appraisal coupled with the backing of the underlying assets. The cash flow by was of PRINCIPAL and interest on the underlying loans is "passed through" to the security holders. Seed Capital.

Regulation should focus on ASSETS rather than LIABILITIES. it is a narrow barometer of market movements since it comprises only 30 stocks. finance and equipment leasing companies are required to maintain liquid assets as . under the chairmanship of A. conversion. Its administration is the responsibility of the Central Excise Department. In the event of an increase in the number of shares outstanding owing to a RIGHTS ISSUE. LIQUIDITY. the minimum period of deposits of NBFCs has been reduced to 12 months. the RBI modified the definition to include convertible preference shares. For instance.50 lakh.) Service Tax A levy on the value of taxable services provided to any person. a beginning was made with the Union Budget for 1994-95 to impose a 5 percent service tax on stockbrokerage. Shah to suggest reforms relating to NON-BANKING FINANCIAL COMPANIES (NBFCs). the telegraph authority or the insurer who is providing taxable services. Therefore. the minimum LIQUIDITY RATIO suggested was 10 percent of total deposit liabilities. the group suggested capital requirement at 8 percent of risk-weighted assets which is comparable to that for banks.. The method of compilation is similar to the one used in Standard & Poor's indices. Based on the recommendations of the CHELLIAH COMMITTEE on tax reforms. Also HIREPURCHASE. deferred revenue expenditure and INTANGIBLE ASSETS. The Union Budget 199697 extended the service tax to advertising. proportional adjustments are made to the weights and base year average market capitalization. the RBI acted upon some important recommendations which are mentioned below :      There should be uniform regulatory norms for all categories of NBFCs. For instance. the index on a particular day is the ratio of the aggregate market capitalization of 30 stocks on that day to the average MARKET CAPITALIZATION of the same stocks during the base period. A weight corresponding to the number of shares outstanding. radio paging and courier services. Shah Committee A working group constituted by the Reserve Bank of India (RBI) in May 1992. general insurance and telephone connection. In 1998. USA. Similarly. The RBI has been implementing these recommendations in a phased manner. (See also NATIONAL INDEX. Although the index is more popular.50 lakh (NOF is the sum of PAID-UP CAPITAL and free reserves less accumulated loss. New NBFCs should have a minimum NOF level of Rs. FINANCIAL LEVERAGE. Its report was submitted in September 1992 and subsequently.Stocks traded on the Bombay Stock Exchange. The task of the group was to carry out an in-depth study of these companies and suggest regulatory and control measures to promote their healthy growth and operations. this view has resulted in a prescription of norms for CAPITAL ADEQUACY.C. The base year is the financial year 1978-79. Examples of liquid assets are bank deposits and investments in GOVERNMENT SECURITIES and APPROVED SECURITIES. for certain purposes). Regulation should be made applicable to incorporated deposit-accepting entities having 'Net Owned Funds' (NOF) of at least Rs. etc. This base-weighted aggregative method assigns to the price of each component share. The onus of collection and payment of tax is on the stockbroker. etc. Mandatory CREDIT RATING for all NBFCs by 1998.

50 crore need not have a consortium. Since the exchange of securities and cash is virtually immediate (to be precise. thereby imparting greater flexibility to the system.V. Shetty. a futures contract is an obligation to accept or effect delivery as per the transaction. For example. The SLR indirectly serves as an instrument of credit control. Speculation An approach to investing that relies more on chance and therefore. Speculation is driven by an expectation of a high rate of return over a very short holding period. However. Stock Index Future Futures contracts based on broad stock market indices. . the settlement would take place within two working days). there is no physical delivery of securities. As a sequel to the report. investors who are bullish could buy stock index futures. This could result in a more competitive pricing and infuse greater discipline owing to a fixed repayment period. but are unsure or unwilling to select specific stocks. Thus companies whose requirements are below Rs. whereas those expecting a market downturn may sell the contract. Spread The difference between the rate of interest charged to borrowers and the rate paid to lenders by a bank or FINANCIAL INSTITUTION. stock index futures enable investors and speculators to take a position based on their opinion about the market without actually selecting individual stocks. they may deal with just one bank.50 crore.per a specified composition at 10 percent of deposits. Canara Bank.50 crore. the RBI effected certain changes in the system of bank finance for WORKING CAPITAL. submitted its report in 1993. Spot Market The transactions in which securities and foreign exchange get traded for immediate delivery. this obligation may be discharged with an offsetting transaction by the last trading day. In April 1997. With stock index futures. Chairman. entails a greater risk. Shetty Committee A committee appointed by the Reserve Bank of India (RBI) to review CONSORTIUM based lending. since each contract represents a hypothetical PORTFOLIO of stocks. So. banks may arrange LOAN SYNDICATION. by reducing the monetization of the DEFICIT that would have taken place if funds from the banking system were not statutorily preempted by the government sector. the term cash market has also been used to refer to spot dealings. This vehicle is meant for investors and active traders who have a forecast on the stock market's direction. as an alternative to the obligatory consortium arrangement. and the difference in market value is settled in each. In general. The instrument may also be used to offset unrealized or probable losses on a long or short position. Statutory Liquidity Ratio (SLR) The portion of net demand and time LIABILITIES that SCHEDULED commercial banks (excluding REGIONAL RURAL BANKS) must invest in specified financial ASSETS such as TREASURY BILLS and GOVERNMENT SECURITIES. In essence. the limit for obligatory consortium arrangement was raised to Rs. even if they credit limit of the borrower exceeded Rs. Also. The committee which was headed by J. it was decided that it would no longer be obligatory for banks to form a consortium.

40% (Fixed) 0. after which the principal sums are reconverted to the original currencies. decisions taken today cannot vary nor reverse what has already happened. In a 'Reverse split'.70% B Pays 10. with no PRINCIPAL obligations changing hands. a company with a variable-rate liability may opt for a swap with another borrower who has raised a fixed-rate loan. A currency swap involves conversion of principal and interest into another currency for the duration of the flows.70% Six-month LIBOR + 0.30% Sweat Equity Equity shares allotted to certain employees of company either on discount or for consideration other than cash. This has been the case with some companies in the U. a mutually beneficial swap could be arranged as illustrated below. Swaps may relate to CAPITAL MARKETS or to the foreign exchange market.70% to A.S. a company hopes to bring down the market price to ensure continued investor interest. 10 shares of PAR VALUE Rs. By reducing the face value and increasing the number of shares (for instance. Swap The exchange of financial LIABILITIES which may be in the same currency or in different currencies.11. Payments Swapped 5. Sunk Costs The costs that have already been incurred because of decisions in the past.60% A pays six-month month LIBOR Six-month LIBOR – 0. . An example of an interest rate swap is shown below.60% 2. with the former enjoying a superior CREDIT RATING which translates into an interest cost advantage.70% Variable-rateloan @ LIBOR + 0. Cost of variable-rate loan 3. Thus. For instance. Cost of fixed-rate loan 10. They are used to manage risks relating to changes in interest rate or foreign exchange rate. Post-swap cost 6. An interest rate swap is undertaken to alter the stream of interest payment flows mostly from fixed to floating or vice versa. where a very low face value with a low market price had created a negative impression on investors. Assuming that there are two companies. Consequently.100). Company A 1.Stock Split Adjustments effected in the FACE VALUE of shares and the number of shares outstanding. Saving interest cost Six-month LIBOR + 0. as a reward for providing know-how or sharing intellectual rights or some other value addition to the company.10% (Variable)0. A and B. Funds raised from the market 4.20% Fixed-rate loan @ 10. such that no change occurs in the total PAID-UP CAPITAL. the difference in the two interest payments would be exchanged. a company increases the face value and accordingly reduces the number of shares. Stock splits are generally associated with shares having a high face value and which correspondingly trade at a higher price.30% Company B 11. 10 each in place of each share of Rs.

e. that stands out relates to :   The framing of norms for INVENTORY and receivables for 15 major industries. by diversifying internationally. The contribution of the committee. for instance. headed by Prakash Tandon. permanent current assets. following the CHORE . which would exceed the performances of the entities achieved separately. was effected to reap the benefit of synergy. i.75 months' consumption Stocks in process : 1/2 month's cost of production Finished goods : 2 months' cost of sales Receivables : 1. it is also termed 'Undiversifiable RISK'. Therefore. Method I and. the methods suggested were : Method I : 0. which could be considered for bank finance. i. The 15 industries included cotton and synthetic textiles. Determining the amount of permissible bank finance. for instance. The committee suggested norms. Major political.75 CA – CL Method III : 0.75 (CA – CL) Method II : 0. CL represents CURRENT LIABILITIES excluding bank lending and CCA stands for the 'Core Current Assets'. paper. which affect the returns on all securities. (See BETA). the lack of coincidence between economic cycles of different countries helps to achieve this. cement. would affect all stocks. It shows the sensitivity of return on a security or a portfolio to return from the market. For example.. pharmaceuticals and engineering.Synergy A notion of disproportionately higher financial benefits expected by combining complementary businesses. Thus. an investor can reduce the level of systematic risk of a PORTFOLIO.75 (CA – CCA) – CL Here CA stands for CURRENT ASSETS corresponding to the suggested norms or past levels if lower..e. to examine the then prevailing system of WORKING CAPITAL financing by banks and to make suitable recommendations on the same. Tandon Committee A study group set up by the Reserve Bank of India (RBI) in 1974. However.25 months' sales For determining the maximum permissible bank finance (MPBF). the MERGER some years ago of the two electrical equipment giants in Europe. Systematic risk of a financial ASSET is indicated by the BETA coefficient. which implies that systematic risk cannot be eliminated by DIVERSIFICATION. economic and social phenomena. the norms proposed for the pharmaceutical industry were : Raw materials : 2. Systematic Risk The portion of risk or variability that is caused by factors. ceilings for inventory and receivables. namely ASEA and Brown Boveri with individual strengths in marketing and R&D respectively.

1 crore and above from the banking system. such as permitting all participants in the SPOT MARKET to operate in the forward market. etc. In October 1993.COMMITTEE recommendations. Financing government expenditure . Other recommendations of the Tandon Committee related to the mode of lending and an information and reporting system concerning the operation of the lending system. by the Reserve Bank of India (RBI). Two types of T-Bills were issued in India. the investor receives the face value and hence the increment constitutes the interest earned. The preconditions include a specified reduction in the GROSS FISCAL DEFICIT of the Union Government. Ordinary T-Bills "on tap" that are taken up mainly by banks. However. which was headed by S. a nominal INFLATION rate. Tarapore Committee A committee on Capital Account CONVERTIBILITY (CAC). Some of the recommendations in the report submitted in 1997 are :      A phased implementation of CAC over a three-year period. However. (See also CONVERTIBILITY (Full)). processing cycle. the committee was asked to recommend measures for achieving CAC and to specify the sequence and time-table for such measures. Among other things. This security bears no DEFAULT RISK and has a high degree of LIQUIDITY and low INTEREST RATE RISK in view of its short term. on behalf of the government :   Ad-hoc T-Bills (or Ad-hocs) of 91 days maturity (which were non-marketable) to the RBI to replenish the Central Government's cash balance.33 was retained. Treasury Bill (T-Bill) A short-term debt instrument of the Government of India. for short-term investment or to comply with statutory requirements. At MATURITY. T-Bills were issued on tap at a fixed DISCOUNT of 4. based on production. the RBI infused operational autonomy by permitting banks to determine appropriate levels of inventory and receivables. MONEY and CAPITAL MARKETS. corporates and others to invest overseas in financial ASSETS and industrial ventures. Measures to develop and integrate the forex. These lending norms were made applicable to all borrowers enjoying an aggregate (FUND-BASED) working capital limit of Rs. Method II have been used by banks in assessing working capital needs of businesses. reduction in the CASH RESERVE RATIO and the level of NON-PERFORMING ASSETS and monitoring of various macroeconomic indicators such as the exchange rate. the requirement of the CURRENT RATIO at 1. Progressively allowing individual residents.e. The purpose behind the low rate was to control the burden of interest charges.60 percent per annum. S. 1997-2000. For several years. The implementation of measures in each phase to be based on certain preconditions or signposts. etc. for the last several years. Tarapore of the Reserve Bank of India. adequacy of reserves. full deregulation in the interest rates. i. The instrument is negotiable and is issued at a discount from the FACE VALUE. the system caused large-scale monetization of government debt. (See also KANNAN COMMITTEE).

changes in consumer issuing Ad-hoc Bills to the RBI caused an increase in the outstanding RESERVE MONEY. the Securities and Exchange Board of India has announced the related regulations. In India. Conversion of outstanding Ad-hocs and tap Bills as on March 31. 364-day T-Bills from April 1992. By an ordinance promulgated in October 1998. Companies in the U. has explicitly forbidden treasury stock operations. The idea was to improve the YIELD. This situation was compounded by the REDISCOUNTING of tap T-Bills by banks with the RBI.. the same ordinance also permits companies to issue SWEAT EQUITY. to eliminate the problem of "WINNER'S CURSE". More recently. The returns on an ASSET can be affected by occurrences such as a labour strike. the government resorted to auctions of 182-day T-Bills from November 1986. Unsystematic Risk A risk that is unique to a firm or industry. As a sequel. however. whereas 182-day and 364-day Bills will be auctioned fortnightly.60 percent per annum and having an indefinite life. Therefore. stock option plans or other purposes. so as to attract investment from sources other than the RBI. Introduction of the practice of notifying amounts in the case of all T-Bill auctions. The proposed use of uniform price auction method in the case of 91-day T-Bills. with the express objective of phasing them out within three years. companies have been allowed to buy back their shares up to 25 percent of their PAID-UP CAPITAL and free reserves. Proposed introduction of 28-day and 182-day (not issued since April 1992) Bills. or even wrong management decisions. these unsystematic variations occur independently of broad price . foreign CENTRAL BANKS and other specified bodies. so as to promote the emergence of a YIELD CURVE for short-term RISK-FREE securities.S. There have been major changes in recent years with regard to T-Bills :        An agreement was singed between the Finance Ministry and the RBI in September 1994 to limit the net issue of Ad-hoc T-Bills. To control such monetization. and 91 day T-Bills from January 1993 (in addition to the tap bill). i. Issue of 14-day Intermediate T-Bills from April 1997 to serve as investment vehicles exclusively for State Governments. Discontinuation of the issuance of Ad-hocs and tap T-Bills from April 1997. bearing an interest rate of 4. Further.e. with specific limits. money created by the RBI. vide Section 77. 1997 into special securities. undertake treasury stock operations for a variety of reasons-the shares could be used for ACQUISITIONS. The former has been substituted by a system of WAYS and MEANS ADVANCES to the Union Government. although the discretion to change the amounts will rest with the RBI Treasury Stock The equity shares repurchased by the issuing company. the Companies Act 1956. the notified amounts are to be pre-announced for the whole year. The adverse impact of any such occurrence would be confined to one or a few firms. it has been decided that 14-day and 91-day Bills will be auctioned weekly.

. i. As a sequel to the report. the MARGINAL COST of a unit of output is the increase in total variable cost entailed by the additional unit. some very significant changes were ushered in by the RBI. CCOUNTS RECEIVABLE and other CURRENT ASSETS. The sum total of the funds so employed is termed 'Gross Working Capital'. The role of venture capital institutions is very important to the economic growth of a nation. direct material. such institutions have been set up at the national and state levels.. Vaghul.movements in the market. 'Diversifiable Risk'. Vaghul Committee A working group on the MONEY MARKET in India. Thus. Hindustan Lever and Colgate) would have less SYSTEMATIC RISK and a higher degree of unsystematic risk. Some of its recommendations for developing the money market were :    Deregulation of administered interest rates. venture capital entails high risk but has the promise of attractive returns.g. Risk Capital and Technology Finance Corporation Limited (RCTFC) and Gujarat Venture Finance Limited (GVFL). Generally. Examples include Technology Development and Information Company of India Limited (TDICI). It was headed by N. The term 'working capital' generally means 'Net Working Capital'.g. i. ordinarily. Working Capital The funds deployed by a company in the form of cash. Because of their assistance. the excess of CURRENT ASSETS over CURRENT LIABILITIES. It is. appointed by the Reserve Bank of India (RBI) in 1986. In India. CERTIFICATE OF DEPOSIT (CD). therefore. as e. direct labour. Venture Capital The long-term financial assistance to projects being set up to introduce new products/ inventions/innovations or to employ or commercialize new technologies. By having a diversified PORTFOLIO.e. which is also therefore termed. ICICI. it is possible to neutralize unsystematic risk. These include the introduction of money market instruments such as CDs and CPs at marketdetermined rates and establishment of the DISCOUNT AND FINANCE HOUSE OF INDIA LIMITED (DFHI). Hence. Examples include materials. Introduction of COMMERCIAL PAPER (CP) and later. firms which are less vulnerable to macroeconomic changes. Variable Cost The expenses that vary proportionately with the level of production activities or volume of output of any business. Activating the SECONDARY MARKET by establishing an institutional intermediary to deal in money market instruments. INVENTORIES.. and lubricants. electricity. direct expenses and certain overheads. also known as 'Risk Capital'. Chairman.e. new entrepreneurs and businesses spring up and contribute significantly to the total wealth of a nation.. those manufacturing consumer non-durables (e.

Zero-coupon Bond A BOND that bears a zero COUPON RATE and hence is issued at a price substantially below its FACE VALUE. Thus. zero-coupon bonds are a sub-set of the group of DEEP DISCOUNT BONDS. Zero-base Budgeting A rigorous method of drawing up BUDGETS in which the premise is that expenditures will be zero. and so allocations are made thereafter. The advantage with this security to an investor is that. the excess of face value over the issue price. only upon a justification of the true requirements. IDBI and SIDBI too have issued the zero-coupon variety of deep discount bonds. . a company need not bother about meeting interest obligations at regular intervals. in January 1994. Similarly. These are current liabilities. An interesting development was the issue of five year zero-coupon bonds by the Government of India by auction. he does not have to worry about reinvestment. an investor receives the face value. In the process. this method does not consider the previous year's allocation. but instead. Hence working capital or better still. this review could lead to considerable economy in inessential expenditure. SHARE CAPITAL and RETAINED EARNINGS. So. and yet would obtain tax deduction. imposes an onerous burden of justifying any expenditure whose approval is sought. repayable within a year. net working capital can be understood as the portion of current assets financed by long-term funds such as loans. it forces administrators or managers to critically appraise ongoing programmes and activities. bank finance and bills payable. Short term sources include TRADE CREDIT. the return consists of the DISCOUNT. A few companies in India have issued such securities especially zero-coupon CONVERTIBLES. i. Current assets are built up with the help of short-term and long-term funds. At MATURITY..e.Net Working Capital = Current Assets � Current Liabilities. Thus. since there are no periodic inflows.

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